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The Conditional Beta and the Cross-Section of Expected Returns

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  • Turan G. Bali
  • Nusret Cakici
  • Yi Tang

Abstract

"We examine the cross-sectional relation between conditional betas and expected stock returns for a sample period of July 1963 to December 2004. Our portfolio-level analyses and the firm-level cross-sectional regressions indicate a positive, significant relation between conditional betas and the cross-section of expected returns. The average return difference between high- and low-beta portfolios ranges between 0.89% and 1.01% per month, depending on the time-varying specification of conditional beta. After controlling for size, book-to-market, liquidity, and momentum, the positive relation between market beta and expected returns remains economically and statistically significant." Copyright (c) 2009 Financial Management Association International..

Suggested Citation

  • Turan G. Bali & Nusret Cakici & Yi Tang, 2009. "The Conditional Beta and the Cross-Section of Expected Returns," Financial Management, Financial Management Association International, vol. 38(1), pages 103-137, March.
  • Handle: RePEc:bla:finmgt:v:38:y:2009:i:1:p:103-137
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    Cited by:

    1. Abu Taher Mollik & M. Khokan Bepari, 2010. "Instability of stock beta in Dhaka Stock Exchange, Bangladesh," Managerial Finance, Emerald Group Publishing, vol. 36(10), pages 886-902, August.
    2. Da, Zhi & Guo, Re-Jin & Jagannathan, Ravi, 2012. "CAPM for estimating the cost of equity capital: Interpreting the empirical evidence," Journal of Financial Economics, Elsevier, vol. 103(1), pages 204-220.
    3. Das, Sudipta, 2015. "Empirical evidence of conditional asset pricing in the Indian stock market," Economic Systems, Elsevier, vol. 39(2), pages 225-239.
    4. Papavassiliou, Vassilios G., 2013. "A new method for estimating liquidity risk: Insights from a liquidity-adjusted CAPM framework," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 184-197.

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