Year: 2012
Type: report
Abstract: We provide a model for why high beta assets are more prone to speculative overpricing than low beta ones.When investors disagree about the common factor of cash-flows, high beta assets are more sensitive to this macro-disagreement and experience a greater divergence-of-opinion about their payoffs.Short-sales constraints for some investors such as retail mutual funds result in high beta assets being over-priced.When aggregate disagreement is low, expected return increases with beta due to risk-sharing.But when it is large, expected return initially increases but then decreases with beta.High beta assets have greater shorting from unconstrained arbitrageurs and more share turnover.Using measures of disagreement about stock earnings and economic uncertainty, we verify these predictions.A calibration exercise yields reasonable parameter values.
DOI: 10.3386/w18548
Authors: Harrison Hong, David Sraer
Institutions: National Bureau of Economic Research, Princeton University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W4241105032