The Beta Anomaly in the Japanese Equity Market and Investor Behavior

Abstract

AbstractIt is well known that high‐beta stocks are associated with a low alpha relative to the capital asset pricing model and to the Fama–French three‐factor model. We show that the beta anomaly in the Japanese market is attributable to foreign institutional investors, not domestic individuals. Foreigners overweight high‐beta stocks; the anomaly weakens or reverses when their investment increases and strengthens when it decreases; and they invest more in high‐beta than low‐beta stocks when increasing investment and sell high‐beta more than low‐beta stocks when reducing it. We do not find analogous results for individual investors. Our results suggest that the beta anomaly reflects a preference for high‐beta securities by institutional investors aiming to beat a benchmark.