Correlation and the omitted variable: A tale of two prices

Xing Han, Zheyao Pan*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

4 Downloads (Pure)

Abstract

We offer a new perspective on the low-beta anomaly by acknowledging the omitted-variable problem in the correlation component of beta: Correlation is “plagued” by firm size (the omitted variable) to exhibit a negative price. Once isolating the size impact, a hidden positive price emerges for the size-orthogonalized component of correlation. Further analyses suggest that (a) the positive price of the size-orthogonalized component is not due to mispricing, supporting the return comovement-based pricing channel; (b) the negative price of the size-explained component is related to illiquidity and coskewness.; (c) the omitted-variable problem also applies to the pricing of beta.

Original languageEnglish
Pages (from-to)519-552
Number of pages34
JournalFinancial Management
Volume50
Issue number2
Early online date22 Sep 2020
DOIs
Publication statusPublished - Jun 2021

Keywords

  • beta anomaly
  • correlation
  • omitted variable bias

Fingerprint

Dive into the research topics of 'Correlation and the omitted variable: A tale of two prices'. Together they form a unique fingerprint.

Cite this