Bad Beta, Good Beta

By John Y. Campbell, Tuomo Vuolteenaho. 2004

1,239 citations recorded by the source corpus.

This paper explains the size and value anomalies' in stock returns using an economically motivated two-beta model. We break the CAPM 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 CAPM since 1963 is explained by the fact that growth stocks and high-past-beta stocks have predominantly good betas with low risk prices.

Subfields: Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/244c8f35a6158f549a87805df28eaea9f76baed3

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Citations in the corpus

Is Accruals Quality a Priced Risk Factor (2008, neutral): “Nevertheless, the test has been extensively used to determine whether a candidate variable is a priced factor (e.g., Jagannathan and Wang, 1996; Campbell and Vuolteenaho, 2004; Hirshleifer et al., 2006; and Petkova, 2006).”
Forecasting real estate prices (2012, neutral): “These include the lagged aggregate stock market (Campbell and Vuolteenaho (2004)), its dividend-price ratio (Fama and French (1988b), Lettau and Van Nieuwerburgh (2008)), the relative 3-month Treasury bill calculated as the current rate minus its twelvemonth moving average (Hodrick (1992)), the…”
Habit formation, the cross section of stock returns and the cash-flow risk puzzle (2010, positive): “…that these two sides of the asset pricing puzzles have to be jointly considered, otherwise the inferences on cash-flow parameters are misleading.8 Campbell and Vuolteenaho (2004) decompose shocks to market returns into shocks to expected discount rates and shocks to expected dividend growth…”
The Returns on Human Capital: Good News on Wall Street is Bad News on Main Street (2005, neutral): “Because the overall price-dividend ratio stays constant, the expected return on the second tree has to decrease (see Cochrane, Longstaff, and Santa-Clara (2004)).”
An Intertemporal CAPM with Stochastic Volatility (2018, positive): “Campbell and Vuolteenaho (2004) , Campbell et al. (2010) , and Campbell et al. (2013) use this approach to argue that value stocks outperform growth stocks on average because growth stocks hedge long-term investors against declines in the expected return on the aggregate stock market.”
Risk, Returns, and Multinational Production (2010, neutral): “E-mail: garettos@bu.edu.”
Realized Beta: Persistence and Predictability (2004, neutral): “, Ang and Chen, 2003) or more novel variants (e.g., Cohen, Polk and Voulteenaho, 2002; Campbell and Vuolteenaho, 2002), and in part it is because competing multi-factor pricing models, although providing improved statistical fit, involve factors whose economic interpretations in terms of systematic ”
How Much Do Investors Care About Macroeconomic Risk? Evidence from Scheduled Economic Announcements (2013, neutral): “Campbell and Vuolteenaho (2004) argue that inflation illusion is a significant source of potential stock mispricing, and in particular that stock market participants appear to underestimate future real dividend growth when inflation is high, as hypothesized by Modigliani and Cohn (1979).27”