Market Betas in Multi-factor Models
51 Pages Posted: 29 Mar 2017 Last revised: 30 Dec 2020
Date Written: December 29, 2020
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: Suggested Citation