Betting against sentiment? Seemingly unrelated anomalies and the low-risk effect |
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Authors: | Maik Dierkes Sebastian Schroen |
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Institution: | Institute of Banking and Finance, Leibniz University Hannover, Hannover, Germany |
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Abstract: | The negative CAPM alphas of high-beta and high-variance stocks are attributable to an unaccounted factor in the CAPM. We use eight seemingly unrelated anomalies to construct a composite factor in the spirit of the optimal orthogonal portfolio (FOP). Accounting for FOP re-establishes a positive relation between beta and average returns in time series regressions as well as cross-sectional and explains the negative alphas of high-beta and high-variance stocks. To analyze economic drivers behind FOP, we perform a horse race between leverage constraints, investor sentiment, and disagreement. Our results highlight investor sentiment as the most promising explanation for the low-risk effect. |
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Keywords: | CAPM low-risk effect optimal orthogonal portfolio |
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