Work

Decomposing the relation between irrational behaviors and beta

Year: 2025

Type: article

Abstract: This paper investigates the bidirectional relation between irrational behaviors and beta. There are two representative irrational noise trading behaviors, autonomous switching and herding. The panel VAR estimation results suggest a two-way Granger causality. On the one hand, beta Granger-causes irrational behaviors. High-beta assets and low-beta assets attract autonomous switching and herding, respectively. Beta's heterogeneous attractiveness stems from the opinion divergence of investors. On the other hand, herding Granger-causes beta positively. The predictive ability of herding for beta arises since herding repels rational traders. The behavior-beta relation differs in optimistic and pessimistic conditions and persists in the environments generalizable to developed markets.

Source: European Journal of Finance

DOI: 10.1080/1351847x.2025.2585969

Authors: Zhenxi Chen, Jinghan Li, Youwei Li

Institutions: South China University of Technology, University of Hull

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

Funders: National Office for Philosophy and Social Sciences, Fundamental Research Funds for the Central Universities, National Social Science Fund of China

Awards: G1388460295, G3817567475, G656640082