Accepted Manuscript

Absolving Beta of Volatility’s Effects

Jianan Liu, Robert F. Stambaugh, Yu Yuan

PII: S0304-405X(18)30016-3DOI: 10.1016/j.jfineco.2018.01.003Reference: FINEC 2847

To appear in: Journal of Financial Economics

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

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Absolving Beta of Volatility’s Effects

by*

Jianan Liu, Robert F. Stambaugh, and Yu Yuan

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.

JEL classifications: G12, G14Keywords: beta, anomaly, volatility

* We are grateful for comments from Li An, Wesley Gray, Michael O’Doherty, Nikolai Roussanov, Jay

Shanken, and participants in the 2017 Mid-Atlantic Research Conference in Finance, the 2017 China In-

ternational Conference in Finance, the 2017 Western Finance Association Meeting, and seminars at the

Shanghai Advanced Institute of Finance, Tulane University, the University of Chicago, and the University of

Pennsylvania. Yuan gratefully acknowledges financial support from the NSF of China (71522012). Author

affiliations/contact information:

Liu: Ph.D. program, Finance Department, The Wharton School, University of Pennsylvania, 3620 Locust

Walk, Philadelphia, PA 19104, United States, email: jiananl@wharton.upenn.edu.

Stambaugh: Miller, Anderson & Sherrerd Professor of Finance, The Wharton School, University of Penn-

sylvania, 3620 Locust Walk, Philadelphia, PA 19104, United States and NBER, United States, phone:

215-898-5734, email: stambaugh@wharton.upenn.edu.

Yuan (corresponding author): Associate Professor of Finance, Shanghai Advanced Institute of Finance,

Shanghai Jiao Tong University, 211 West Huaihai Road, Shanghai, China, 200030, and Fellow, Wharton Fi-

nancial Institutions Center, University of Pennsylvania, phone: +86-21-6293-2114, fax : +86-21-6293-2231,

email: yyuan@saif.sjtu.edu.cn.

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