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http://ssrn.com/abstract=528994
 
 

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Conditional Betas


Tano Santos


Columbia Business School; National Bureau of Economic Research (NBER)

Pietro Veronesi


University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

April 2004

NBER Working Paper No. w10413

Abstract:     
Empirical evidence shows that conditional market betas vary substantially over time. Yet, little is known about the source of this variation, either theoretically or empirically. Within a general equilibrium model with multiple assets and a time varying aggregate equity premium, we show that conditional betas depend on (a) the level of the aggregate premium itself; (b) the level of the firm's expected dividend growth; and (c) the firm's fundamental risk, that is, the one pertaining to the covariation of the firm's cash-flows with the aggregate economy. Especially when fundamental risk (c) is strong, the model predicts that market betas should display a large time variation, that their cross-sectional dispersion should be negatively related to the aggregate premium, and that investments in physical capital should be positively related to changes in betas. These predictions find considerable support in the data.

Number of Pages in PDF File: 49

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Date posted: April 20, 2004  

Suggested Citation

Santos, Tano and Veronesi, Pietro, Conditional Betas (April 2004). NBER Working Paper No. w10413. Available at SSRN: http://ssrn.com/abstract=528994

Contact Information

Tano Santos (Contact Author)
Columbia Business School ( email )
3022 Broadway
New York, NY 10027
United States
212-854-0489 (Phone)
212-316-9180 (Fax)

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Pietro Veronesi
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-6348 (Phone)
773-702-0458 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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