This paper investigates whether beta can predict the expected return after controlling for the beta instability resulting from shift in the covariance structure. Such a shift is primarily due to noise investors chasing stocks with high idiosyncratic volatility. Consequently, these stocks tend to...

Despite the crucial role of the market factor in Fama and French's three-factor model, the market beta has failed to explain the cross-sectional differences in expected returns proxied by the future realized returns of individual stocks. However, current evidence does not necessarily reject the...

In this paper we show that the failure of the CAPM beta to predict individual stocks' expected returns documented by Fama and French (1992) is largely driven by a small group of stocks with large betas and high idiosyncratic volatilities. These stocks' betas tend to reverse. Therefore, even when...