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http://ssrn.com/abstract=649462
 
 

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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)

March 10, 2004

AFA 2005 Philadelphia Meetings Paper

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 pro-cyclical, 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: 54

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Date posted: January 16, 2005  

Suggested Citation

Santos, Tano and Veronesi, Pietro, Conditional Betas (March 10, 2004). AFA 2005 Philadelphia Meetings Paper. Available at SSRN: http://ssrn.com/abstract=649462 or http://dx.doi.org/10.2139/ssrn.649462

Contact Information

Tano Santos (Contact Author)
Columbia Business School ( email )
420 West 118th Street
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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