Beta herding through overconfidence: A behavioral explanation of the low-beta anomaly

We investigate asset returns using the concept of beta herding, which measures cross-sectional variations in betas due to changes in investors' confidence about their market outlook. Overconfidence causes beta herding (compression of betas towards the market beta), while under-confidence leads to adverse beta herding (dispersion of betas from the market beta). We show that the low-beta anomaly can be explained by a return reversal following adverse beta herding, as high beta stocks underperform low beta stocks exclusively following periods of adverse beta herding. This result is robust to investors' preferences for lottery-like assets, sentiment, and return reversals, and beta herding leads time variation in betas. (C) 2020 Elsevier Ltd. All rights reserved.

Automated summary

This study investigates asset returns using the concept of beta herding, finding that overconfidence leads to beta herding and under-confidence results in adverse beta herding. The low-beta anomaly can be explained by a return reversal following adverse beta herding.