Abstract

http://ssrn.com/abstract=1108711
 
 

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Investor Expectations, Business Conditions, and the Pricing of Beta-Instability Risk


William N. Goetzmann


Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

Akiko Watanabe


University of Alberta - School of Business; University of Alberta - Department of Finance and Statistical Analysis

Masahiro Watanabe


University of Alberta - School of Business; University of Alberta - Department of Finance and Statistical Analysis

January 21, 2009

AFA 2009 San Francisco Meetings Paper
EFA 2007 Ljubljana Meetings Paper
Yale ICF Working Paper

Abstract:     
This paper examines the pricing implications of time-variation in assets' market betas over the business cycle in a conditional CAPM framework. We use a half century of real GDP growth expectations from economists' surveys to determine forecasted economic states. This approach largely avoids the confounding effects of econometric forecasting model error. The expectation measure forecasts the market return controlling for existing predictive variables. The loadings on the expectation measure explain a significant fraction of cross-sectional variation in stock returns. A fully tradable, ex ante mimicking portfolio generates positive risk-adjusted returns during good economic times over four decades.

Number of Pages in PDF File: 56

Keywords: conditional CAPM, beta-instability risk, value and growth betas, time-varying premium, business cycle, Livingston Survey, investor expectations

JEL Classification: G12

working papers series


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Date posted: March 25, 2008 ; Last revised: January 27, 2013

Suggested Citation

Goetzmann, William N. and Watanabe, Akiko and Watanabe, Masahiro, Investor Expectations, Business Conditions, and the Pricing of Beta-Instability Risk (January 21, 2009). AFA 2009 San Francisco Meetings Paper; EFA 2007 Ljubljana Meetings Paper; Yale ICF Working Paper. Available at SSRN: http://ssrn.com/abstract=1108711 or http://dx.doi.org/10.2139/ssrn.1108711

Contact Information

William N. Goetzmann (Contact Author)
Yale School of Management - International Center for Finance ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-5950 (Phone)
203-432-8931 (Fax)
HOME PAGE: http://viking.som.yale.edu

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Akiko Watanabe
University of Alberta - School of Business ( email )
3-30A Business Building
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-0385 (Phone)
780-492-3325 (Fax)
HOME PAGE: http://www.bus.ualberta.ca/awatanabe
University of Alberta - Department of Finance and Statistical Analysis ( email )
2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada
HOME PAGE: http://www.bus.ualberta.ca/awatanabe

Masahiro Watanabe
University of Alberta - School of Business ( email )
School of Business - FMS
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-7343 (Phone)
780-492-3325 (Fax)
HOME PAGE: http://www.ualberta.ca/~masa/
University of Alberta - Department of Finance and Statistical Analysis ( email )
2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada

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