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The Effect of Investor Sentiment on Betting Against Beta: A Structural Equations Modeling Approach Towards Beta Anomaly

Author

Listed:
  • Hooman Abdollahi

    (Department of Industrial Engineering, Karaj Branch, Islamic Azad University, Karaj, Iran,)

  • Seyed Babak Ebrahimi

    (Department of Industrial Engineering, K.N. Toosi University of Technology, Tehran, Iran)

  • Hamed Tayebi

    (Department of Industrial Engineering, Karaj Branch, Islamic Azad University, Karaj, Iran)

Abstract

Beta anomaly is one of the greatest anomalies in finance literature as capital asset pricing model (CAPM) conveys a positive relationship between the beta of a stock and future returns; however, empirical studies do not document this proposition. Branded as betting against beta (BAB), this conundrum is known as a controversial subject. Drawing on literature the authors propose new multi-factor models to develop our understanding of BAB using investor sentiment as well as structural equation modeling methodology to gauge the models in the presence of the top-down approach. Results indicate that investor sentiment provides a good explanation of the BAB. Limitation and future research directions are presented at the end of paper.

Suggested Citation

  • Hooman Abdollahi & Seyed Babak Ebrahimi & Hamed Tayebi, 2017. "The Effect of Investor Sentiment on Betting Against Beta: A Structural Equations Modeling Approach Towards Beta Anomaly," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 201-206.
    • Handle: RePEc:eco:journ1:2017-01-26
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    References listed on IDEAS

    as
    1. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
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    3. Blume, Marshall E & Friend, Irwin, 1973. "A New Look at the Capital Asset Pricing Model," Journal of Finance, American Finance Association, vol. 28(1), pages 19-33, March.
    4. Deven Bathia & Don Bredin, 2013. "An examination of investor sentiment effect on G7 stock market returns," The European Journal of Finance, Taylor & Francis Journals, vol. 19(9), pages 909-937, October.
    5. Blitz, D.C. & van Vliet, P., 2007. "The Volatility Effect: Lower Risk without Lower Return," ERIM Report Series Research in Management ERS-2007-044-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
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    More about this item

    Keywords

    Behavioral Finance; Investor Sentiment; Betting Against Beta Factor;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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