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Investor Expectations, Business Conditions, and the Pricing of Beta-Instability Risk

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Author Info

  • William Goetzmann
  • Akiko Watanabe
  • Masahiro Watanabe

Abstract

This paper examines the pricing implications of time-variation in assets' market betas over the business cycle in a conditional CAPM framework. We use a half century of real GDP growth expectations from economists' surveys to determine forecasted economic states. This approach largely avoids the confounding effects of econometric forecasting model error. The expectation measure forecasts the market return controlling for existing predictive variables. The loadings on the expectation measure explain a significant fraction of cross-sectional variation in stock returns. A fully tradable, ex ante mimicking portfolio generates positive risk-adjusted returns during good economic times over four decades.

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File URL: http://icfpub.som.yale.edu/publications/2656
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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number amz2656.

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Date of creation: 01 Mar 2008
Date of revision: 01 Jan 2009
Handle: RePEc:ysm:somwrk:amz2656

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Web page: http://icf.som.yale.edu/
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Related research

Keywords: conditional CAPM; beta-instability risk; value and growth betas; time-varying premium; business cycle; Livingston Survey; investor expectations;

References

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  18. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
  19. Kalok Chan & Allaudeen Hameed & Sie Ting Lau, 2003. "What if Trading Location Is Different from Business Location? Evidence from the Jardine Group," Journal of Finance, American Finance Association, vol. 58(3), pages 1221-1246, 06.
  20. Jonathan Lewellen & Stefan Nagel, 2003. "The Conditional CAPM does not Explain Asset-Pricing Anamolies," NBER Working Papers 9974, National Bureau of Economic Research, Inc.
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Cited by:
  1. Cosemans, M. & Frehen, R.G.P. & Schotman, P.C. & Bauer, R.M.M.J., 2009. "Efficient Estimation of Firm-Specific Betas and its Benefits for Asset Pricing Tests and Portfolio Choice," MPRA Paper 23557, University Library of Munich, Germany.

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