Speculative Betas in Europe - Based on Evidence from Western European Stocks and Bonds

Abstract: We find and present compelling evidence to reject the classic one-regime CAPM Security Market Line based on data from developed European equity markets which we proxy by taking the original 12 members of the euro area combined with the UK. We construct a bottom-up measure for aggregate disagreement which we prove to negatively influence the curvature of the Security Market Line. When disagreement is high the curve is concave, thus, a beta anomaly emerges under which low-beta assets tend to outperform high-beta assets due to speculative mispricing, however, when disagreement is low conventional, positive risk-return trade-off prevails. Our results support Hong and Sraer's (2016) theoretical model and are on par with their empirical results in terms of both economic and statistical significance. We also expand the analysis to bond markets of the same country group, however, we fail to document the spillover effect of the phenomenon.