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Bad Beta, Good Beta

58 Pages Posted: 23 Oct 2002  

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Tuomo Vuolteenaho

Arrowstreet Capital, LP; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2003

Abstract

This paper explains the size and value "anomalies" in stock returns using an economically motivated two-beta model. We break the CAPMbeta of a stock with the market portfolio into two components, one reflecting news about the market's future cash flows and one reflecting news about the market's discount rates. Intertemporal asset pricing theory suggests that the former should have a higher price of risk; thus beta, like cholesterol, comes in "bad" and "good" varieties. Empirically, we find that value stocks and small stocks have considerably higher cash-flow betas than growth stocks and large stocks, and this can explain their higher average returns. The poor performance of the CAPMsince 1963 is explained by the fact that growth stocks and high-past-beta stocks have predominantly good betas with low risk prices.

JEL Classification: G12, G14, N22

Suggested Citation

Campbell, John Y. and Vuolteenaho, Tuomo, Bad Beta, Good Beta (August 2003). Harvard Institute of Economic Research Discussion Paper No. 2016. Available at SSRN: https://ssrn.com/abstract=343780 or http://dx.doi.org/10.2139/ssrn.343780

John Y. Campbell (Contact Author)

Harvard University - Department of Economics ( email )

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Tuomo Vuolteenaho

Arrowstreet Capital, LP ( email )

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United States

National Bureau of Economic Research (NBER)

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United States

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