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A Lottery Demand-Based Explanation of the Beta Anomaly

Last Updated on 10 February, 2024 by Rejaul Karim

The research paper “A Lottery Demand-Based Explanation of the Beta Anomaly” by Bali, Brown, Murray, and Tang delves into the persistent anomaly of stocks with high (low) beta yielding low (high) abnormal returns, known as the beta anomaly.

The study presents compelling evidence of investors’ penchant for lottery-like stocks as a significant factor driving this anomaly. Notably, the paper reveals that neutralizing beta-sorted portfolios to eliminate lottery demand, or incorporating control measures for lottery demand in regression specifications and factor models, leads to the disappearance of the beta anomaly.

Furthermore, the analysis highlights that the anomaly is more pronounced in stocks with lower levels of institutional ownership, and is specifically attributable to the price impact of lottery demand on high-beta stocks.

Abstract Of Paper

The low (high) abnormal returns of stocks with high (low) beta – the beta anomaly – is one of the most persistent anomalies in empirical asset pricing research. This paper 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.

Original paper – Download PDF

Here you can download the PDF and original paper of A Lottery Demand-Based Explanation of the Beta Anomaly.

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Author

Turan G. Bali
Georgetown University – McDonough School of Business

Stephen J. Brown
New York University – Stern School of Business

Scott Murray
Georgia State University

Yi Tang
Fordham University – Gabelli School of Business

Conclusion

In closing, “A Lottery Demand-Based Explanation of the Beta Anomaly” sheds light on the persistent anomaly of stocks with low (high) beta demonstrating low (high) abnormal returns. The study compellingly establishes that investors’ interest in lottery-like stocks significantly influences the beta anomaly.

Notably, the paper’s findings demonstrate that neutralizing beta-sorted portfolios to counteract lottery demand, integrating control measures for lottery demand in regression specifications, or introducing a lottery demand factor in factor models effectively eradicates the beta anomaly.

Furthermore, the analysis emphasizes that the anomaly is particularly prevalent in stocks with reduced levels of institutional ownership and is specifically driven by the price impact of lottery demand on high-beta stocks.

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FAQ

How does the research paper explain the beta anomaly, and what key factor does it identify as a driver for this anomaly?

The research paper explains the beta anomaly as the phenomenon where stocks with high beta exhibit low abnormal returns, and stocks with low beta demonstrate high abnormal returns. The key factor identified as a driver for this anomaly is investors’ demand for lottery-like stocks. The paper establishes that this penchant for lottery-like stocks significantly influences and contributes to the persistent beta anomaly.

What measures or adjustments are suggested by the study to neutralize or control for lottery demand, and how do these measures impact the detection of the beta anomaly?

The study suggests several measures to neutralize or control for lottery demand. These include neutralizing beta-sorted portfolios to counteract lottery demand, incorporating control measures for lottery demand in regression specifications, and introducing a lottery demand factor in factor models. The impact of applying these measures is a noteworthy one – the detection of the beta anomaly disappears when these adjustments are made. It underscores the crucial role of lottery demand in driving the beta anomaly.

In which subset of stocks is the beta anomaly more pronounced, and what specific factor contributes to the anomaly within this subset?

The beta anomaly is more pronounced in stocks with lower levels of institutional ownership. The specific factor contributing to the anomaly within this subset is identified as the price impact of lottery demand on high-beta stocks. The study highlights that this relationship is a key driver of the beta anomaly, particularly in stocks with reduced institutional ownership.

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