Market Betas in Multi-factor Models

51 Pages Posted: 29 Mar 2017 Last revised: 30 Dec 2020

See all articles by Seung C. Ahn

Seung C. Ahn

Arizona State University (ASU) - Economics Department

Alex R. Horenstein

University of Miami - School of Business Administration - Department of Economics

Date Written: December 29, 2020

Abstract

Under the APT framework and the assumption that the market portfolio is well-diversified, if not mean-variance efficient, the common factors in raw-returns are the market return plus the common factors in the space of excess-returns over the market return. This explains why the market betas fail to explain the cross-section of expected returns in multi-factor models. Market betas cannot price assets because either they are under-identified or become unitary. However, the market portfolio is still useful for asset pricing because the empirical relevance of a multi-factor model can be tested by using excess-returns over the market return.

Keywords: Market betas, well-diversified portfolios, multi-factor models.

JEL Classification: C58, G11, G12

Suggested Citation

Ahn, Seung C. and Horenstein, Alex R., Market Betas in Multi-factor Models (December 29, 2020). Available at SSRN: https://ssrn.com/abstract=2942537 or http://dx.doi.org/10.2139/ssrn.2942537

Seung C. Ahn

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

Alex R. Horenstein (Contact Author)

University of Miami - School of Business Administration - Department of Economics ( email )

P.O. Box 248126
Coral Gables, FL 33124-6550
United States

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