Market Frictions continued (short selling) - How do sale constraint affect the CAPM
5 important questions on Market Frictions continued (short selling) - How do sale constraint affect the CAPM
What is the low beta anomaly?
What might cause the low beta anomaly?
- Benchmarking by asset management industry
- beat the benchmark
- Increase weight on high beta stocks
- High beta stocks overpriced!
- Disagreement + short sale constraints = overpricing
- investors with negative expectation cannot express this in trading
- Their opinion is not incorporated into the market price
- Investors with positive expectations are overrepresented
- Prices are too high
What is the intuition behind the low market beta anomaly?
- High beta stocks --> higher exposure to market factor
- in case of disagreement about the common factor --> larger impact on high beta stocks
- Beta amplifies disagreement
- Combined with SSC --> overpricing of high beta stocks compared to low beta stocks --> higher expected return low beta stocks
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What are the hypothesis about beta and disagreement?
- High beta stocks experience more disagreeement in months with high aggregate disagreement
- In low disagreement months, the SML is upward sloping. In high disagreement months, the SML has a kink shape
- The average slope of the SML is strictly higher in low disagreement months than in high disagreement month
Short sale constraints + disagreement
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