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Where Do Betas Come From? Asset Price Dynamics and the Sources of Systematic Risk

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  • Campbell, John Y.
  • Mei, Jianping

Abstract

In this article we break asset's betas with common factors into components attributable to news about future cash flows, real interest rates, and excess returns. To achieve this decomposition, we use a vector autoregressive time-series model and an approximate log-linear present value relation. The betas of industry and size portfolios with the market are largely attributed to changing expected returns. Betas with inflation and industrial production reflect opposing cash flow and expected return effects. We also show how asset pricing theory restricts the expected excess return components of betas.

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File URL: http://dash.harvard.edu/bitstream/handle/1/3353757/campbell_wheredobetas.pdf
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Bibliographic Info

Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3353757.

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Date of creation: 1993
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Publication status: Published in Review of Financial Studies
Handle: RePEc:hrv:faseco:3353757

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