Details
| Original language | English |
|---|---|
| Pages (from-to) | 152-176 |
| Number of pages | 25 |
| Journal | Review of Financial Economics |
| Volume | 41 |
| Issue number | 2 |
| Publication status | Published - 10 Apr 2023 |
Abstract
The negative CAPM alphas of high-beta and high-variance stocks are attributable to an unaccounted factor in the CAPM. We use eight seemingly unrelated anomalies to construct a composite factor in the spirit of the optimal orthogonal portfolio (FOP). Accounting for FOP re-establishes a positive relation between beta and average returns in time series regressions as well as cross-sectional and explains the negative alphas of high-beta and high-variance stocks. To analyze economic drivers behind FOP, we perform a horse race between leverage constraints, investor sentiment, and disagreement. Our results highlight investor sentiment as the most promising explanation for the low-risk effect.
Keywords
- CAPM, low-risk effect, optimal orthogonal portfolio
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
- Finance
- Economics, Econometrics and Finance(all)
- Economics and Econometrics
Cite this
- Standard
- Harvard
- Apa
- Vancouver
- BibTeX
- RIS
In: Review of Financial Economics, Vol. 41, No. 2, 10.04.2023, p. 152-176.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - Betting against sentiment?
T2 - Seemingly unrelated anomalies and the low-risk effect
AU - Dierkes, Maik
AU - Schroen, Sebastian
N1 - Funding Information: Open Access funding enabled and organized by Projekt DEAL.
PY - 2023/4/10
Y1 - 2023/4/10
N2 - The negative CAPM alphas of high-beta and high-variance stocks are attributable to an unaccounted factor in the CAPM. We use eight seemingly unrelated anomalies to construct a composite factor in the spirit of the optimal orthogonal portfolio (FOP). Accounting for FOP re-establishes a positive relation between beta and average returns in time series regressions as well as cross-sectional and explains the negative alphas of high-beta and high-variance stocks. To analyze economic drivers behind FOP, we perform a horse race between leverage constraints, investor sentiment, and disagreement. Our results highlight investor sentiment as the most promising explanation for the low-risk effect.
AB - The negative CAPM alphas of high-beta and high-variance stocks are attributable to an unaccounted factor in the CAPM. We use eight seemingly unrelated anomalies to construct a composite factor in the spirit of the optimal orthogonal portfolio (FOP). Accounting for FOP re-establishes a positive relation between beta and average returns in time series regressions as well as cross-sectional and explains the negative alphas of high-beta and high-variance stocks. To analyze economic drivers behind FOP, we perform a horse race between leverage constraints, investor sentiment, and disagreement. Our results highlight investor sentiment as the most promising explanation for the low-risk effect.
KW - CAPM
KW - low-risk effect
KW - optimal orthogonal portfolio
UR - http://www.scopus.com/inward/record.url?scp=85134528684&partnerID=8YFLogxK
U2 - 10.1002/rfe.1170
DO - 10.1002/rfe.1170
M3 - Article
AN - SCOPUS:85134528684
VL - 41
SP - 152
EP - 176
JO - Review of Financial Economics
JF - Review of Financial Economics
SN - 1058-3300
IS - 2
ER -