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A Lottery-Demand-Based Explanation of the Beta Anomaly

Published online by Cambridge University Press:  27 December 2017

Turan G. Bali ,
Stephen J. Brown ,
Scott Murray  and
Yi Tang
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Abstract

The low (high) abnormal returns of stocks with high (low) beta, which we refer to as the beta anomaly, is one of the most persistent anomalies in empirical asset pricing research. This article 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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 6 , December 2017 , pp. 2369 - 2397
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

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Footnotes

1

Recipient of the 2014 Jack Treynor Prize sponsored by the Q-Group (The Institute for Quantitative Research in Finance). We are grateful to Hendrik Bessembinder (the editor) and Alok Kumar and Mark Ready (the referees) for their extremely helpful comments and suggestions. We thank Vikas Agarwal, Senay Agca, Reena Aggarwal, Oya Altinkilic, Hadiye Aslan, Bill Baber, Jennie Bai, Malcolm Baker, Arik Ben Dor, Lee Biggerstaff, Kelly Brunarski, Colin Campbell, Preeti Choudhary, Jess Cornaggia, Ray da Silva Rosa, Richard DeFusco, Ozgur Demirtas, Donna Dudney, Kathleen Farrell, Stephen Figlewski, Geoffrey Friesen, Gerry Gay, John Geppert, William Goetzmann, Brad Goldie, Bruce Grundy, Jingling Guan, Brian Henderson, Tyler Henry, Jason Hsu, Dalida Kadyrzhanova, Andrew Karolyi, Haim Kassa, Omesh Kini, Allison Koester, Tunde Kovacs, Di Li, Yijia Lin, Hanno Lustig, Katie McDermott, Stanislava Nikolova, Terry Nixon, Manferd Peterson, Lee Pinkowitz, Chip Ryan, Rob Schoen, Shane Shepherd, Zhen Shi, Wei Tang, Gary Twite, Mary Elizabeth Thompson, Emre Unlu, Robert Van Order, Christian Wagner, Robert Whitelaw, Rohan Williamson, Jeff Wurgler, Steve Wyatt, Baozhong Yang, Jie Yang, Kamil Yilmaz, Jianfeng Yu, Yuzhao Zhang, Yichao Zhu, Yosef Zweibach, and seminar participants at the 2015 Conference on Pacific Basin Finance, Economics, Accounting, and Management; the 2015 Financial Management Association (FMA) Meeting; the 2015 FMA Applied Finance Conference; the 2015 ITAM Finance Conference; the 2015 Midwest Finance Association Meeting; the Spring 2015 Q-Group Seminar; the 2015 Society for Financial Studies Finance Cavalcade; the 2015 Western Finance Association Conference; Barclays, City University of New York; George Washington University; Georgetown University; Georgia State University; Koc University; Lancaster University; Miami University; Monash University; New York University; Sabanci University; the University of Melbourne; the University of Minho; the University of Nebraska–Lincoln; the University of South Australia; and the University of Western Australia for constructive comments that have substantially improved the paper. A previous version of this paper was titled “Betting against Beta or Demand for Lottery?”

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