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How Do Alphas and Betas Move? Uncertainty, Learning and Time Variation in Risk Loadings

45 Pages Posted: 3 Nov 2009 Last revised: 27 Jul 2010

Carmine Trecroci

University of Brescia

Multiple version iconThere are 2 versions of this paper

Date Written: July 15, 2010

Abstract

I employ a parsimonious model with learning but without conditioning information to extract time-varying measures of market-risk sensitivities, pricing errors and pricing uncertainty. Parameters estimated for U.S. equity portfolios show significant fluctuations, along patterns that change across size and book-to-market categories of stocks. Time-varying betas display superior predictive accuracy for portfolio returns against constant and rolling-window OLS estimates. I also study the relationship of betas with business-cycle variables, finding that those of high BE/ME stocks move pro-cyclically, unlike those of low BE/ME stocks. Investment growth, rather than consumption, predicts the betas of high BE/ME and small-firm portfolios.

Keywords: Conditional CAPM, Time-varying beta, uncertainty, learning

JEL Classification: G12, C51

Suggested Citation

Trecroci, Carmine, How Do Alphas and Betas Move? Uncertainty, Learning and Time Variation in Risk Loadings (July 15, 2010). Available at SSRN: https://ssrn.com/abstract=1498752 or http://dx.doi.org/10.2139/ssrn.1498752

Carmine Trecroci (Contact Author)

University of Brescia ( email )

Via San Faustino 74B
Brescia, 25122
Italy

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