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Where Do Betas Come From? Asset Price Dynamics and the

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  • Campbell, John Y
  • Mei, Jianping

Abstract

In this article we break assets' betas with common factors into components attributable to news about future cash flows, real interest rates, and excess returns. To achieve this decomposition, we use 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. We also show how asset pricing theory restricts the expected excess return components of betas. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Campbell, John Y & Mei, Jianping, 1993. "Where Do Betas Come From? Asset Price Dynamics and the," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 567-592.
  • Handle: RePEc:oup:rfinst:v:6:y:1993:i:3:p:567-92
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    Cited by:

    1. Zolotoy, Leon & Frederickson, James R. & Lyon, John D., 2017. "Aggregate earnings and stock market returns: The good, the bad, and the state-dependent," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 157-175.
    2. Fukuta, Yuichi & Yamane, Akiko, 2015. "Value premium and implied equity duration in the Japanese stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 39(C), pages 102-121.
    3. John Y. Campbell & Tuomo Vuolteenaho, 2004. "Bad Beta, Good Beta," American Economic Review, American Economic Association, pages 1249-1275.
    4. John Y. Campbell & Jens Hilscher & Jan Szilagyi, 2008. "In Search of Distress Risk," Journal of Finance, American Finance Association, vol. 63(6), pages 2899-2939, December.
    5. Owen A. Lamont, 2000. "Investment Plans and Stock Returns," Journal of Finance, American Finance Association, vol. 55(6), pages 2719-2745, December.
    6. N. Valckx, 2001. "Stock and Bond Market Sensitivities to Monetary Variables," WO Research Memoranda (discontinued) 680, Netherlands Central Bank, Research Department.
    7. Roberto Marfè, 2015. "Labor Rigidity and the Dynamics of the Value Premium," Carlo Alberto Notebooks 429, Collegio Carlo Alberto.
    8. Peter Hecht & Tuomo Vuolteenaho, 2005. "Explaining Returns with Cash-Flow Proxies," NBER Working Papers 11169, National Bureau of Economic Research, Inc.
    9. repec:kap:jrefec:v:55:y:2017:i:3:d:10.1007_s11146-016-9590-z is not listed on IDEAS
    10. Drobetz, Wolfgang & Menzel, Christina & Schröder, Henning, 2016. "Systematic risk behavior in cyclical industries: The case of shipping," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 88(C), pages 129-145.
    11. Engsted, Tom & Pedersen, Thomas Q., 2014. "Housing market volatility in the OECD area: Evidence from VAR based return decompositions," Journal of Macroeconomics, Elsevier, pages 91-103.
    12. Thorbecke, Willem, 1997. " On Stock Market Returns and Monetary Policy," Journal of Finance, American Finance Association, vol. 52(2), pages 635-654, June.
    13. Martin Lettau & Sydney C. Ludvigson & Jessica A. Wachter, 2008. "The Declining Equity Premium: What Role Does Macroeconomic Risk Play?," Review of Financial Studies, Society for Financial Studies, pages 1653-1687.
    14. Wei, Peihwang & Yang, Xiaolou, 2012. "Do investors value REITs and Non-REITs differently?," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 295-302.
    15. John Y. Campbell & Christopher Polk & Tuomo Vuolteenaho, 2010. "Growth or Glamour? Fundamentals and Systematic Risk in Stock Returns," Review of Financial Studies, Society for Financial Studies, pages 305-344.
    16. Willem Thorbecke, 1995. "Financial Derivatives: Harnessing the Benefits and Containing the Dangers," Economics Working Paper Archive wp_145, Levy Economics Institute.
    17. Engsted, Tom & Pedersen, Thomas Q., 2014. "Housing market volatility in the OECD area: Evidence from VAR based return decompositions," Journal of Macroeconomics, Elsevier, pages 91-103.

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