The dispersion of beta estimates and the investors' heterogeneous Beliefs:Evidence from the stock market in China

The estimate of beta depends on some factors like the market portfolios choice, the time horizons and the return intervals. Therefore, this paper uses 27 alternative methods to estimate the beta for each stock in the Chinese stock market and defines the dispersion of beta estimates as a factor to explain the stocks future returns. We construct the portfolios based on the dispersion across the beta estimates and hold it for one month. These arbitrage portfolios earn significant negative returns which cannot be explained by the Carhart four-factor model. Moreover, we explain the predict power of beta estimates dispersion by the heterogeneous belief. In the market with restricted short-selling, the stocks with high beta dispersion have larger heterogeneity belief, which leads to their underperformance. Compared with the traditional proxy for heterogeneous belief, the beta dispersion also provides some information and we prove that it can be another proxy for the belief heterogeneity.