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Abstract
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 language | English |
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Article number | 103961 |
Pages (from-to) | 1-28 |
Number of pages | 28 |
Journal | Journal of Economic Dynamics and Control |
Volume | 117 |
DOIs | |
Publication status | Published - Aug 2020 |
Keywords
- Security market line
- Beta anomaly
- Betting against beta
- Overconfidence
- Mutual fund
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Projects
- 2 Finished
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Slow Diffusion of Information in Asset Pricing and Risk Management
1/01/18 → 31/12/20
Project: Research