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Disentangling Beta and Value Premium Using Macroeconomic Risk Factors

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  • William Espe
  • Pradosh Simlai

Abstract

In this paper, we study the time-varying total risk of value and growth stocks. The objective is to investigate the contention that the market factor's ability to explain the value premium is limited. Inspired by Ferson and Harvey [1999], we revisit the role of the market beta in the presence of aggregate economic factors. We discuss the incorporation of aggregate economic conditions in the context of multifactor risk models and provide cross-sectional evidence on the relationship between average returns and postranking betas for book-to-market (BE/ME) sorted portfolios. We show that the ineffective role of the market beta can be altered by incorporating aggregate economic risk factors in the cross-sectional asset pricing tests of size and BE/ME sorted portfolios. No previous study provides such a decomposition of the cross-sectional role of the market beta in the presence of macroeconomic risk factors.

Suggested Citation

  • William Espe & Pradosh Simlai, 2012. "Disentangling Beta and Value Premium Using Macroeconomic Risk Factors," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 47(2), pages 104-118, April.
    • Handle: RePEc:pal:buseco:v:47:y:2012:i:2:p:104-118
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