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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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Publication status: published as Review of Financial Studies. vol 6, no. 3, 1993, p. 567-592
Handle: RePEc:nbr:nberwo:4329

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  1. John Y. Campbell, 1985. "Stock Returns and the Term Structure," NBER Working Papers 1626, National Bureau of Economic Research, Inc.
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  4. Sims, Christopher A, 1987. "Vector Autoregressions and Reality: Comment," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 5(4), pages 443-49, October.
  5. David H. Cutler & James M. Poterba & Lawrence H. Summers, 1988. "What Moves Stock Prices?," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 487, Massachusetts Institute of Technology (MIT), Department of Economics.
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  7. Keim, Donald B. & Stambaugh, Robert F., 1986. "Predicting returns in the stock and bond markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 17(2), pages 357-390, December.
  8. Campbell, John, 1991. "A Variance Decomposition for Stock Returns," Scholarly Articles 3207695, Harvard University Department of Economics.
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  17. Chan, K C & Chen, Nai-Fu, 1991. " Structural and Return Characteristics of Small and Large Firms," Journal of Finance, American Finance Association, American Finance Association, vol. 46(4), pages 1467-84, September.
  18. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 1029-54, July.
  19. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
  20. Fama, Eugene F, 1990. " Stock Returns, Expected Returns, and Real Activity," Journal of Finance, American Finance Association, American Finance Association, vol. 45(4), pages 1089-1108, September.
  21. Shanken, Jay, 1990. "Intertemporal asset pricing : An Empirical Investigation," Journal of Econometrics, Elsevier, Elsevier, vol. 45(1-2), pages 99-120.
  22. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 22(1), pages 3-25, October.
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