Persistent Mispricing and Beta Anomaly

Abstract: The beta anomaly—the negative risk-adjusted return earned by a long-short portfolio on market beta—reverses sign and becomes statistically significant when evaluated against mispricing-based factor models. Among a large set of potential mispricing variables, only those related to equity issuance help to explain the anomaly. Using insights from the literature on equity issuance, we then conclude that the anomaly reflects persistent mispricing. Consequently, we identify persistently high investor sentiment as a key conditioning factor for the existence of the anomaly. Moreover, we show that persistent mispricing serves as an important underlying mechanism linking analyst disagreement and market volatility to the pricing of beta.