Modified Beta and Cross-Sectional Stock Returns
Posted: 20 Sep 2011 Last revised: 8 Mar 2012
Date Written: September 16, 2011
We incorporate up versus down markets in time series regressions, and we compare the predictive power in cross-sectional asset returns of the CAPM beta, beta from up markets, beta from down markets, and two modified betas based on scaling the CAPM beta by the up/down betas. The CAPM beta scaled by the ratio of Up beta to Down beta is the only type of beta that demonstrates any predictive power. Moreover, this modified beta remains significant even when including size and book-to-market characteristics and SMB, HML and momentum factors as explanatory variables.
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