Accepted Manuscript Absolving Beta of Volatility’s Effects Jianan Liu, Robert F. Stambaugh, Yu Yuan PII: S0304-405X(18)30016-3 DOI: 10.1016/j.jfineco.2018.01.003 Reference: FINEC 2847 To appear in: Journal of Financial Economics Received date: 13 January 2017 Accepted date: 11 February 2017 Please cite this article as: Jianan Liu, Robert F. Stambaugh, Yu Yuan, Absolving Beta of Volatility’s Effects, Journal of Financial Economics (2018), doi: 10.1016/j.jfineco.2018.01.003 This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.
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Received date: 13 January 2017Accepted date: 11 February 2017
Please cite this article as: Jianan Liu, Robert F. Stambaugh, Yu Yuan, Absolving Beta of Volatility’sEffects, Journal of Financial Economics (2018), doi: 10.1016/j.jfineco.2018.01.003
This is a PDF file of an unedited manuscript that has been accepted for publication. As a serviceto our customers we are providing this early version of the manuscript. The manuscript will undergocopyediting, typesetting, and review of the resulting proof before it is published in its final form. Pleasenote that during the production process errors may be discovered which could affect the content, andall legal disclaimers that apply to the journal pertain.
First Draft: April 17, 2016This Version: December 19, 2017
Abstract
The beta anomaly, negative (positive) alpha on stocks with high (low) beta, arises frombeta’s positive correlation with idiosyncratic volatility (IVOL). The relation between IVOLand alpha is positive among underpriced stocks but negative and stronger among overpricedstocks (Stambaugh, Yu, and Yuan, 2015). That stronger negative relation combines withthe positive IVOL-beta correlation to produce the beta anomaly. The anomaly is significantonly within overpriced stocks and only in periods when the beta-IVOL correlation and thelikelihood of overpricing are simultaneously high. Either controlling for IVOL or simplyexcluding overpriced stocks with high IVOL renders the beta anomaly insignificant.