Economic Uncertainty and the Beta Anomaly

59 Pages Posted: 28 Feb 2022 Last revised: 25 Aug 2022

See all articles by Zhiqi Cao

Zhiqi Cao

Shanghai Jiao Tong University (SJTU)

Wenfeng Wu

Shanghai Jiao Tong University - Antai College of Economics & Management

Youchang Wu

University of Oregon - Lundquist College of Business

Date Written: August 25, 2022

Abstract

Using various indices of economic uncertainty, we document a new stylized fact about the beta anomaly: while the beta-alpha relation is robustly negative following low economic uncertainty, it is insignificant following high economic uncertainty. We argue that this result arises because demand for high-beta stocks varies with economic uncertainty due to investors' ambiguity aversion and uncertainty-dependent risk aversion. Consistent with this argument, when uncertainty is high, mutual fund investors chase low-beta funds, and actively-managed mutual funds exchange high-beta stocks for low-beta ones. Accordingly, unexpected rises in economic uncertainty are associated with poorer performance of high-beta stocks relative to low-beta stocks, which helps to make the subsequent stock returns more in line with betas.

Keywords: Economic uncertainty; ambiguity aversion; asset pricing anomaly; idiosyncratic volatility; mutual fund; stock return

JEL Classification: G12; G14

Suggested Citation

Cao, Zhiqi and Wu, Wenfeng and Wu, Youchang, Economic Uncertainty and the Beta Anomaly (August 25, 2022). Available at SSRN: https://ssrn.com/abstract=4034987 or http://dx.doi.org/10.2139/ssrn.4034987

Zhiqi Cao

Shanghai Jiao Tong University (SJTU) ( email )

KoGuan Law School
Shanghai 200030, Shanghai 200052
China

Wenfeng Wu (Contact Author)

Shanghai Jiao Tong University - Antai College of Economics & Management ( email )

No. 1954 Huashan Road
Shanghai, Shanghai 200030
China

Youchang Wu

University of Oregon - Lundquist College of Business ( email )

1280 University of Oregon
Eugene, OR 97403
United States

HOME PAGE: http://www.youchangwu.com

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