Aged and Recent Market Betas in Securities Pricing

Abstract:     
[This version of the paper now starts with a note that explains why we have effectively decided not to pursue this research direction further, as well as material that discusses why it is better to use stocks than preformed portfolios in asset-pricing tests.]

Instead of computing only one five-year market-beta, we compute one recent beta from 1 month to 2 years ago, and one aged market beta from 2 to 10 years ago, both using daily stock returns. We find that the aged beta has a positive influence on stock returns, consistent with standard hedging concerns. The recent beta has a negative influence on stock returns, whose cause is less clear. The evidence suggests that it is due to a novel factor, possibly behavioral or attention related. Previous research had failed to find that market-beta matters, primarily because ordinary market-betas combine these two opposing forces and because betas based on monthly stock returns are too weak. The importance of the two separate betas increases if we control for the Fama-French factors.

Keywords: market-beta, factor pricing, APT

JEL Classifications: G12

Working Paper Series