CAPM, Components of Beta and the Cross Section of Expected Returns
58 Pages Posted: 19 Aug 2012 Last revised: 30 Jul 2019
Date Written: November 12, 2015
This paper demonstrates that a conditional version of the Capital Asset Pricing Model (CAPM) explains the cross section of expected returns, just as well as the three factor model of Fama and French. This is achieved by measuring beta (systematic risk) with short-, medium- and long-run components. The short-run component of beta is computed from daily returns over the prior year, while the medium-run beta component is from daily returns over the prior 5 years, and the long-run component from monthly returns over the prior 10 years.
Keywords: Asset Pricing, Systematic Risk, Mixed Frequency Data, Realized Beta, Component Models
JEL Classification: C58, G12
Suggested Citation: Suggested Citation