Slow but steady wins the race : an inquiry into the fundamental relation between systematic risk and stock returns with empirical evidence from the Oslo Stock Exchange in the period of 1990 – 2018

Abstract

A value-weighted (equal-weighted) portfolio comprised of the twenty percent of the stocks on the Oslo Stock Exchange with the lowest beta each month produced cumulative excess returns of 1241% (692%) from 1990 to 2018. A value-weighted (equal-weighted) portfolio comprised of the twenty percent of the stocks on the Oslo Stock Exchange with the highest beta only generated cumulative excess returns of 6% (22%) over the same period. The beta anomaly refers to the low (high) abnormal returns of stocks with a high (low) beta. In this thesis, we examine the presence of a beta anomaly on the Oslo Stock Exchange in the period of 1990 to 2018, and perform a replicating study of A Lottery Demand-Based Explanation of the Beta Anomaly, by Bali, Brown, Murray, and Tang, to investigate whether the notion of lottery demand - investors’ disproportionately high demand for lottery-like stocks - can explain the beta anomaly. Our results demonstrate an economically large and statistically significant beta anomaly on the Oslo Stock Exchange relative to conventional asset pricing models. We also find that our proxy for lottery demand, a variable MAX, correlates negatively with future stock returns. However, our results do not support the postulation that lottery demand plays an important role in generating the beta anomaly on the Oslo Stock Exchange, and our conclusions thus deviate from those of the paper we replicate.