Systematic Risk Changes, Negative Realized Excess Returns and Time-Varying CAPM Beta
Journal Title: Finance a uver - Year 2015, Vol 65, Issue 2
Abstract
We make two methodological modifications to the method of testing CAPM beta and we show that these significantly affect inferences about the association between CAPM beta and stock returns. While the conventional beta proxy is indeed largely unrelated to realized stock returns (in fact the relationship is slightly negative), using forward-looking beta and eliminating unrealistic assumptions about expected market returns makes it (highly) significant. In addition, we show that complementary empirical factors—size and ratio of the book-to-market value of equity—that are sometimes presented as potential remedies to beta’s deficiencies do not seem to outperform beta. This suggests that weak empirical support for CAPM beta is likely caused by complications with implementing CAPM rather than by the weakness of the underlying concept.
Authors and Affiliations
Jiri Novak
Manager Characteristics and Manager-Replacement: How Is Pension Fund Performance Affected?
Pension funds are professionally managed investment products designed to cover the retirement needs of individual investors, so managerial control mechanisms are crucial to future retirement income. In this paper, we ana...
The Nexus Between Systemic Risk and Sovereign Crises
This paper focuses on the relationship between the financial system and sovereign debt crises by analyzing sovereign support to banks and banks’ resulting exposure to the bonds issued by weak sovereigns. We construct an...
Analysis of Variance in Household Financial Portfolio Choice: Evidence from Spain
We analyse the determinants of the household financial portfolio allocation using an estimator and a variance decomposition that take into account the constrained nature of household portfolio allocations. We apply these...
Systematic Risk Changes, Negative Realized Excess Returns and Time-Varying CAPM Beta
We make two methodological modifications to the method of testing CAPM beta and we show that these significantly affect inferences about the association between CAPM beta and stock returns. While the conventional beta pr...
Pension Demand and Utility: The Life Annuity Puzzle
This paper shows by means of the concept of utility that annuitization through life annui-ties or a pension can be an efficient instrument for the economic assurance of seniors. Various quantitative arguments are present...