Articlegreen2017

A Lottery-Demand-Based Explanation of the Beta Anomaly

Turan G. Bali · Stephen J. Brown · Scott Murray · Yi Tang

372 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Financial Markets and Investment Strategies Corporate Finance and Governance Financial Analysis and Corporate Governance

Abstract

The low (high) abnormal returns of stocks with high (low) beta - the beta anomaly - is one of the most persistent anomalies in empirical asset pricing research. This paper demonstrates that investors' demand for lottery-like stocks is an important driver of the beta anomaly. The beta anomaly is no longer detected when beta-sorted portfolios are neutralized to lottery demand, regression specifications control for lottery demand, or factor models include a lottery demand factor. The beta anomaly is concentrated in stocks with low levels of institutional ownership and it exists only when the price impact of lottery demand is concentrated in high-beta stocks.

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References

1993Common risk factors in the returns on stocks and bonds 1997On Persistence in Mutual Fund Performance 1992The Cross-Section of Expected Stock Returns 1992Advances in prospect theory: Cumulative representation of uncertainty 1973Risk, Return, and Equilibrium: Empirical Tests 1993Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency 2002Illiquidity and stock returns: cross-section and time-series effects 2003Liquidity Risk and Expected Stock Returns

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2019Left-tail momentum: Underreaction to bad news, costly arbitrage and equity returns 2016Empirical Asset Pricing: The Cross Section of Stock Returns 2016Reference-dependent preferences and the risk–return trade-off 2019Lottery-Related Anomalies: The Role of Reference-Dependent Preferences 2016Crash Sensitivity and Cross-Section of Expected Stock Returns 2019Political risk and cost of equity: The mediating role of political connections

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