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Bad beta, good beta

Author: John Y Campbell; Tuomo Vuolteenaho; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, ©2003.
Series: Working paper series (National Bureau of Economic Research), no. 9509.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
Abstract: This paper explains the size and value anomalies' in stock returns using an economically motivated two-beta model. We break the CAPM beta of a stock with the market portfolio into two components, one reflecting news about the market's future cash flows and one reflecting news about the market's discount rates. Intertemporal asset pricing theory suggests that the former should have a higher price of risk;  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: John Y Campbell; Tuomo Vuolteenaho; National Bureau of Economic Research.
OCLC Number: 52099347
Notes: "February 2003."
Description: 1 online resource (56 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 9509.
Responsibility: John Y. Campbell, Tuomo Vuolteenaho.

Abstract:

Abstract: This paper explains the size and value anomalies' in stock returns using an economically motivated two-beta model. We break the CAPM beta of a stock with the market portfolio into two components, one reflecting news about the market's future cash flows and one reflecting news about the market's discount rates. Intertemporal asset pricing theory suggests that the former should have a higher price of risk; thus beta, like cholesterol, comes in bad' and good' varieties. Empirically, we find that value stocks and small stocks have considerably higher cash-flow betas than growth stocks and large stocks, and this can explain their higher average returns. The poor performance of the CAPM since 1963 is explained by the fact that growth stocks and high-past-beta stocks have predominantly good betas with low risk prices.

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