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Realized Betas and the Cross-Section of Expected Returns

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  • Claudio Morana

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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.

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File URL: http://www.biblioecon.unito.it/biblioservizi/RePEc/icr/wp2008/ICERwp15-08.pdf
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Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers - Applied Mathematics Series with number 15-2008.

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Length: pages
Date of creation: Jun 2008
Handle: RePEc:icr:wpmath:15-2008
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