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

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  • John Campbell
  • Jianping Mei

Abstract

This paper breaks assets' betas with common factors into components attributable to news about future cash flows, real interest rates, and excess returns. To achieve this decomposition the paper uses 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. The paper also shows how asset pricing theory restricts the expected excess return components of betas.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4329.

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Date of creation: Apr 1993
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Handle: RePEc:nbr:nberwo:4329

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  19. Chen, Nai-Fu, 1991. " Financial Investment Opportunities and the Macroeconomy," Journal of Finance, American Finance Association, vol. 46(2), pages 529-54, June.
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