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Conditional Betas

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Author Info
Tano Santos
Pietro Veronesi
Abstract

Empirical evidence shows that conditional market betas vary substantially over time. Yet, little is known about the source of this variation, either theoretically or empirically. Within a general equilibrium model with multiple assets and a time varying aggregate equity premium, we show that conditional betas depend on (a) the level of the aggregate premium itself; (b) the level of the firm's expected dividend growth; and (c) the firm's fundamental risk, that is, the one pertaining to the covariation of the firm's cash-flows with the aggregate economy. Especially when fundamental risk (c) is strong, the model predicts that market betas should display a large time variation, that their cross-sectional dispersion should be negatively related to the aggregate premium, and that investments in physical capital should be positively related to changes in betas. These predictions find considerable support in the data.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10413.

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Date of creation: Apr 2004
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Handle: RePEc:nbr:nberwo:10413

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G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mariano M. Croce & Martin Lettau & Sydney C. Ludvigson, 2007. "Investor Information, Long-Run Risk, and the Duration of Risky Cash-Flows," NBER Working Papers 12912, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Lieven Baele & Koen Inghelbrecht, 2005. "Structural versus Temporary Drivers of Country and Industry Risk," International Finance 0511005, EconWPA. [Downloadable!]
    Other versions:
  3. Tobias Adrian & Francesco Franzoni, 2008. "Learning about beta: time-varying factor loadings, expected returns, and the conditional CAPM," Staff Reports 193, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  4. Lettau, Martin & Wachter, Jessica, 2005. "Why is Long-Horizon Equity Less Risky? A Duration-based Explanation of the Value Premium," CEPR Discussion Papers 4921, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Tano Santos & Pietro Veronesi, 2005. "Cash-Flow Risk, Discount Risk, and the Value Premium," NBER Working Papers 11816, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Andrew Ang & Joseph chen, 2005. "CAPM Over the Long Run: 1926-2001," NBER Working Papers 11903, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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