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

56 Pages Posted: 25 Mar 2008 Last revised: 27 Jan 2013

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

Date Written: January 21, 2009

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.

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

JEL Classification: G12

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: https://ssrn.com/abstract=1108711 or http://dx.doi.org/10.2139/ssrn.1108711

William N. Goetzmann (Contact Author)

Yale School of Management - International Center for Finance ( email )

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P.O. Box 208200
New Haven, CT 06520-8200
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203-432-5950 (Phone)
203-436-9252 (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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