The Beta Anomaly in the Japanese Equity Market and Investor Behavior


  • We thank the Issue Editor, Sheridan Titman, Chu Zhang (discussant and referee), Sudipto Dasgupta (the editor) and other participants at the International Review of Finance Conference on Japanese Financial Markets in Tokyo and the 2013 Nippon Finance Association Conference for their helpful comments. Iwasawa acknowledges financial support from Japan Society of Promotion of Science (JSPS KAKENHI Grant Number 25380412).


It 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.