Beta Uncertainty and Anomaly

When facing uncertainty surrounding the risk loading, or beta uncertainty, arbi- trageurs allocate less arbitrage capital to anomalies. In this paper, we introduce a Beysian stochastic CAPM that explicitly accommodates separate random processes in beta and idiosyncratic volatility to estimate beta uncertainty in anomaly portfolios. We provide both theoretical and empirical evidence that beta uncertainty serves as arbitrage barriers to slow down …