Bad Beta, Good Beta | Zendy

John Y. Campbell | Zendy; Tuomo Vuolteenaho | Zendy

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Bad Beta, Good Beta

Author(s) -

John Y. Campbell,

Tuomo Vuolteenaho

Publication year - 2004

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/0002828043052240

Subject(s) - capital asset pricing model , economics , beta (programming language) , growth stock , financial economics , market portfolio , stock (firearms) , portfolio , value premium , cash flow , systematic risk , econometrics , stock market , monetary economics , stock market bubble , finance , horse , computer science , engineering , biology , programming language , mechanical engineering , paleontology

This paper explains the size and value "anomalies" in stock returns using an economically motivated two-beta model. We break the beta of a stock with the market portfolio into two components, one reflecting news about the market's future cash flows and one reflecting news about the market's discount rates. Intertemporal asset pricing theory suggests that the former should have a higher price of risk; thus beta, like cholesterol, comes in "bad" and "good" varieties. Empirically, we find that value stocks and small stocks have considerably higher cash-flow betas than growth stocks and large stocks, and this can explain their higher average returns. The poor performance of the capital asset pricing model (CAPM) since 1963 is explained by the fact that growth stocks and high-past-beta stocks have predominantly good betas with low risk prices.

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