Investigating the Beta Anomaly on the Oslo Stock Exchange: A Cross-sectional Analysis

Fabian Bruaas Jørgensen & Peder Steinsland Sagbakken

Student thesis: Master thesis

Abstract

We investigate the ability of the CAPM, the Fama-French three-factor model, and the Carhart four-factor model to describe the average monthly stock returns on the Oslo Stock Exchange in the period 2009 – 2017. In addition, we test whether the observed beta anomaly on the Oslo Stock Exchange can be attributed constrained investors in terms of leverage and margin requirements, or if the beta anomaly can be attributed a demand for lottery-like stocks. Using a sample free of survivorship bias, we construct a market factor and factors related to firm size, book-to-market-value of equity, momentum, margin- and leverage constrained investors, and the demand for lottery stocks. We apply the portfolio sorts approach, as well as Fama and MacBeth (1973) regressions on portfolios formed on firm characteristics to estimate factor exposures and risk premia. From our portfolio sorts approach we find no systematic pattern in the excess returns on portfolios sorted on firm characteristics. The CAPM estimates insignificant market risk premia across all portfolio sorts. We find that the three-factor model increases the predictability of excess stock returns on the Oslo Stock Exchange, and produces a significant market risk premium and a SMB risk premium for portfolios sorted on size. Surprisingly, both risk premia are estimated to be negative. The three-factor model has trouble explaining the returns on portfolios sorted on other firm characteristics. The inclusion of a momentum factor does not improve the predictability signficantly, and we conclude that the estimated factor models explain the cross-section of excess returns on the Oslo Stock Exchange to a limited extent. We find that constrained investors in terms of leverage and margin requirements are a likely contributor to the beta anomaly on the Oslo Stock Exchange. Further, we find no evidence that a demand for lottery stocks contribute to the beta anomaly. This coincides with the lottery stock hypothesis, given the low ownership share of private investors on the Oslo Stock Exchange.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2018
Number of pages142
SupervisorsSøren Plesner