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Realized Betas and the Cross-Section of Expected Returns

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  • Claudio Morana

Abstract

What explains the cross section of expected returns for the 25 size/value Fama-French portfolios? It is found that modelling time-varying betas is important to explain the cross-section of expected returns, as well as to comply with the time series restriction on Jensen-alpha. Support for a modi?ed version of the conditional Jagannathan and Wang (1996) CAPM model is found, where implementation is carried out in the realized beta framework proposed in the paper. About 63% of the cross-sectional variability of the expected returns for the 25 Fama-French size and value sorted portfolios is then found to be explained by this parsimonious two-variable model.

Suggested Citation

  • Claudio Morana, 2008. "Realized Betas and the Cross-Section of Expected Returns," ICER Working Papers - Applied Mathematics Series 15-2008, ICER - International Centre for Economic Research.
    • Handle: RePEc:icr:wpmath:15-2008
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    Cited by:

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    3. Guglielmo Maria Caporale & Luis A. Gil-Alana & Miguel Martin-Valmayor, 2020. "Persistence in the Realized Betas: Some Evidence for the Spanish Stock Market," CESifo Working Paper Series 8171, CESifo.
    4. Massimo Biasin & Roy Cerqueti & Emanuela Giacomini & Nicoletta Marinelli & Anna Grazia Quaranta & Luca Riccetti, 2019. "Macro Asset Allocation with Social Impact Investments," Sustainability, MDPI, vol. 11(11), pages 1-19, June.

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    More about this item

    Keywords

    realized regression; time-varying beta; conditional CAPM;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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