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Conditional Betas and Investor Uncertainty

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  • Fernando D. Chague

Abstract

We derive theoretical expressions for market betas from a rational expectation equilibrium model where the representative investor does not observe if the economy is in a recession or an expansion. Market betas in this economy are time-varying and related to investor uncertainty about the state of the economy. The dynamics of betas will also vary across assets according to the assets' cash-flow structure. In a calibration exercise, we show that value and growth firms have cash-flow structures that imply an opposing beta dynamics that goes in the direction of solving the value premium puzzle. During high uncertainty periods, value betas are higher while growth betas are lower. We estimate conditional betas empirically using proxies for investor uncertainty and show support of the model's prediction about the dynamics of growth and value betas.

Suggested Citation

  • Fernando D. Chague, 2013. "Conditional Betas and Investor Uncertainty," Working Papers, Department of Economics 2013_04, University of São Paulo (FEA-USP).
    • Handle: RePEc:spa:wpaper:2013wpecon4
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    More about this item

    Keywords

    Conditional CAPM; Conditional Betas; Uncertainty;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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