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Absolving beta of volatility’s effects

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  • Liu, Jianan
  • Stambaugh, Robert F.
  • Yuan, Yu

Abstract

The beta anomaly, negative (positive) alpha on stocks with high (low) beta, arises from beta’s positive correlation with idiosyncratic volatility (IVOL). The relation between IVOL and alpha is positive among underpriced stocks but negative and stronger among overpriced stocks (Stambaugh, Yu, and Yuan, 2015). That stronger negative relation combines with the positive IVOL-beta correlation to produce the beta anomaly. The anomaly is significant only within overpriced stocks and only in periods when the beta-IVOL correlation and the likelihood of overpricing are simultaneously high. Either controlling for IVOL or simply excluding overpriced stocks with high IVOL renders the beta anomaly insignificant.

Suggested Citation

  • Liu, Jianan & Stambaugh, Robert F. & Yuan, Yu, 2018. "Absolving beta of volatility’s effects," Journal of Financial Economics, Elsevier, vol. 128(1), pages 1-15.
  • Handle: RePEc:eee:jfinec:v:128:y:2018:i:1:p:1-15
    DOI: 10.1016/j.jfineco.2018.01.003
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    2. Joonhyun Kim, 2018. "Volatilities of Book Income and Taxable Income and Their Risk Relevance," Social Sciences, MDPI, Open Access Journal, vol. 7(11), pages 1-14, October.
    3. Becker, Janis & Hollstein, Fabian & Prokopczuk, Marcel & Sibbertsen, Philipp, 2019. "The Memory of Beta Factors," Hannover Economic Papers (HEP) dp-661, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    4. Hollstein, Fabian & Prokopczuk, Marcel & Wese Simen, Chardin, 2019. "Estimating beta: Forecast adjustments and the impact of stock characteristics for a broad cross-section," Journal of Financial Markets, Elsevier, vol. 44(C), pages 91-118.
    5. Sebastien Valeyre & Sofiane Aboura & Denis Grebenkov, 2019. "The Reactive Beta Model," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 42(1), pages 71-113, March.
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    8. Asness, Cliff & Frazzini, Andrea & Gormsen, Niels Joachim & Pedersen, Lasse Heje, 2020. "Betting against correlation: Testing theories of the low-risk effect," Journal of Financial Economics, Elsevier, vol. 135(3), pages 629-652.
    9. Han, Xing & Li, Kai & Li, Youwei, 2020. "Investor overconfidence and the security market line: New evidence from China," Journal of Economic Dynamics and Control, Elsevier, vol. 117(C).

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    More about this item

    Keywords

    Beta; Anomaly; Volatility;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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