CAPM, Components of Beta and the Cross Section of Expected Returns

58 Pages Posted: 19 Aug 2012 Last revised: 30 Jul 2019

See all articles by Tolga Cenesizoglu

Tolga Cenesizoglu

HEC Montreal - Department of Finance

Jonathan J. Reeves

UNSW Business School, University of New South Wales; Financial Research Network (FIRN)

Date Written: November 12, 2015

Abstract

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

Cenesizoglu, Tolga and Reeves, Jonathan J., CAPM, Components of Beta and the Cross Section of Expected Returns (November 12, 2015). Available at SSRN: https://ssrn.com/abstract=2131029 or http://dx.doi.org/10.2139/ssrn.2131029

Tolga Cenesizoglu (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

HOME PAGE: http://www.hec.ca/en/profs/tolga.cenesizoglu.html

Jonathan J. Reeves

UNSW Business School, University of New South Wales ( email )

Sydney, NSW 2052
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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