Linear-Betas in the Cross-Section of Returns

41 Pages Posted: 16 Feb 2020

See all articles by Reed Douglas

Reed Douglas

University of Southern California, Department of Finance and Business Economics

Date Written: January 20, 2020

Abstract

This paper evaluates a specification for conditional beta models following Fama and French (2019). In this paper, I reject the Fama and French model that assumes characteristics are conditional betas in favor of a linear conditional beta model following Shanken (1990). Model-implied zero-beta rates are particularly sensitive to the specification, and the linear conditional beta model provides a significantly lower rate. Out-of-sample tests show that the Linear-Beta Model has a significantly lower bias and Clark and West (2007) adjusted MSPE, but it may come at the cost of a larger variance than the Fama and French model.

Keywords: Fama-MacBeth, Cross-Section, Time-Varying Beta, Linear-Beta Model

JEL Classification: G10, G12, G19

Suggested Citation

Douglas, Reed, Linear-Betas in the Cross-Section of Returns (January 20, 2020). Available at SSRN: https://ssrn.com/abstract=3522641 or http://dx.doi.org/10.2139/ssrn.3522641

Reed Douglas (Contact Author)

University of Southern California, Department of Finance and Business Economics ( email )

CA
United States

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