
Beta herding
Beta herding means convergence of market betas of individual stocks that arises from investors’ biased perceptions. Adverse beta herding denotes the dispersion of such betas that arises from a reversal of the bias. A new paper suggests that overconfidence in predictions of overall market direction and positive sentiment are key drivers of beta convergence, while uncertainty and negative sentiment are conducive to beta dispersion. Knowing which trends prevail helps macro trading. First, beta herding implies that directional market moves create price distortions (as the bad rise and fall with the good). Second, adverse beta herding causes low-beta stock returns to outperform high-beta stock returns on a risk-adjusted basis. This reinforces and qualifies what is commonly known as the “low beta bias” of equity returns. (more…)