Investor overconfidence and the security market line: New evidence from China

Xing Han, Kai Li, Youwei Li

Research output: Contribution to journalArticlepeer-review

17 Citations (Scopus)


This paper documents a highly downward-sloping security market line (SML) in China, which is more puzzling than the typical “flattened” SML in the US, and does not reconcile with existing theories of the low-beta anomaly. We show that investor overconfidence offers some promises in resolving the puzzle in China: In the time-series dimension, the slope of the SML becomes more “inverted” when investors get more overconfident. This dynamic overconfidence effect is intensified with biased self-attribution. As a general symptom of overconfidence in the cross section, high-beta stocks are also the mostly heavily traded. After accounting for trading volume, there is no longer the low-beta anomaly at both the firm and portfolio levels. Mutual fund evidence reinforces the view that institutional investors actively exploit the portfolio implications of a downward-sloping SML by shying away from high-beta stocks and betting on low-beta stocks for superior performance.
Original languageEnglish
Article number103961
Pages (from-to)1-28
Number of pages28
JournalJournal of Economic Dynamics and Control
Publication statusPublished - Aug 2020


  • Security market line
  • Beta anomaly
  • Betting against beta
  • Overconfidence
  • Mutual fund


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