Can Idiosyncratic Volatility Explain Beta Anomaly?

The capital asset pricing model makes stock returns and risks in the market,but market risks are not enough to explain all stock returns.Since the establishment of China's a-share market,there are also various financial anomalies.Due to the untimely availability of market information and irrational trading by investors,financial anomalies cannot be eliminated by arbitrage trade in a timely manner.Beta anomalies are one of them.Beta anomaly was discovered by Black(1993)at the early stage of the development of pricing model,and questioned the tilt Angle of traditional CAPM model.Black pointed out that CAPM is actually more flat than theory,because among stocks with high Beta,excess yield is lower than that of Beta stocks.This paper mainly studies Beta anomalies,and analyzes the influence of asset mispricing,characteristic volatility and other indicators on Beta anomalies by using the method of group research.Mispricing of assets is computed using the method of cross-sectional comparison to form mispricing indicators comprehensively on the basis of calculating multiple financial anomalies,and to distinguish whether stocks are relatively overvalued or undervalued by sorting on cross-sectional analysis.The slope summation method is used to calculate the coefficient of the return rate of the current and last period,and the systematic risk of the stock is considered more comprehensively.The residual standard deviation is used to measure the characteristic volatility of individual stocks.The data used is collected from CSMAR and RESSET,start from January 2002 to December 2018,the quarterly,monthly and daily data of all a-share listed companies in the financial industry and the real estate industry are excluded.Through group comparison,it is found that there are significant Beta anomalies in China's a-share market.After ranking by mispricing index,Beta anomalies are only significant in overvalued stocks,but not significant in undervalued stocks.Then the validity of Beta as a factor was tested by FM regression.This article has carried on the follow-up series demonstration analysis.First of all,after studying trait volatility,it is found that the inconsistency between stocks that are overvalued and undervalued also appears in trait volatility anomaly.Therefore,it is inferred that trait volatility is the cause of Beta anomaly.Then,after removing the high characteristic volatility stocks that are overrated,the samples were analyzed and the Beta anomalies were found to disappear.There was no Beta anomaly after controlling the trait volatility,but the trait volatility was still significant after controlling the size of the Beta value.The results of the above two parts of empirical research prove that trait volatility has a significant impact on Beta anomalies,and Beta anomalies only exist in overvalued stocks,the explanation for that is Beta anomalies is caused by volatility anomalies.The idiosyncratic volatility anomaly is only significant in overvalued stocks,which is caused by the asymmetry of arbitrage between overvalued stocks and undervalued stocks.Due to the restriction of short selling in stock trading system,which is particularly prominent in China's stock market,and investors are not completely rational in arbitrage trading,it is difficult to overestimate the profit of short selling stock.When,after the stock overvalued stock price through the market arbitrage recover to normal levels,causing the overvalued stocks on the market,the more the overvalued stocks in excess yields is negatively related to the idiosyncratic volatility of stronger than underestimate excess yields and qualities of volatility in the stock,make show the excess yields and qualities in the overall stock market volatility is negatively related,known as the idiosyncratic volatility anomaly.The correlation analysis of A-share Beta and characteristic volatility shows that the monthly cross-sectional correlation coefficient from 2003 to 2018 is 0.10,which theoretically belongs to the market risk and the characteristics of the stock,but actually shows A weak positive correlation.This phenomenon is because stocks with high volatility are more sensitive to market changes,so they are more likely to be mispriced,and the degree of return rate change is greater,so the Beta of the stock will be larger.Moreover,both characteristic volatility and stock Beta belong to stock risk,which will be affected by the same factors in the company's operation.The Beta anomaly is formed by the combination of the above two factors.Since the trait volatility and excess returns are only positively correlated in the overrated stocks,while there is a weak positive correlation between the trait volatility and Beta,the trait volatility anomaly leads to the Beta anomaly in the overrated stocks.The cross-grouping of the positive correlation between the high and low investor sentiment and the strong and weak Beta-ivol further verifies this view.In investor sentiment,that is,there may be more stock,and Beta-ivol positive correlation relationship between strong group,Beta vision is more apparent,explain the formation of the Beta vision need stock overvalued conditions of idiosyncratic volatility is negatively related to the excess yields,and Beta value and idiosyncratic volatility is positively related to these two conditions exist at the same time.Subsequently,by changing the calculation method of mispricing index,the sample period was changed to 2007 to 2018,and the same conclusion was obtained.