A Lottery Demand-Based Explanation of the Beta Anomaly 

Turan G. Bali Stephen J. Brown  Scott Murray  Yi Tang
Journal of Financial and Quantitative Analysis
The low (high) abnormal returns of stocks with high (low) beta -the beta anomaly
-- is one of the most persistent anomalies in empirical asset pricing research. This paper
demonstrates that investors' demand for lottery-like stocks is an important driver of
the beta anomaly. The beta anomaly is no longer detected when beta-sorted portfolios
are neutralized to lottery demand, regression specications control for lottery demand,
or factor models include a lottery demand factor. The beta anomaly is concentrated
in stocks with low levels of institutional ownership and it exists only when the price
impact of lottery demand is concentrated in high-beta stocks.