Deleveraging CAPM: Asset Betas vs. Equity Betas

25 Pages Posted: 14 Oct 2021

See all articles by Emilio Barone

Emilio Barone

Luiss - Guido Carli (Dpt. of Economics and Finance)

Gaia Barone

School of Business, National College of Ireland

Date Written: October 13, 2021

Abstract

The classic estimates of CAPM equity betas are notoriously unstable. We assume that this is mainly due to changes of firm’s leverage over time. In order to take leverage into account, we propose a new approach where asset correlations among firms are pairwise constant, while equity correlations change over time as a function of the stochastic evolution of firms’ asset values. The paper closes with a simulation that helps to show the model’s features.

Keywords: Asset management, derivatives, corporate finance, risk management

JEL Classification: G13

Suggested Citation

Barone, Emilio and Barone, Gaia, Deleveraging CAPM: Asset Betas vs. Equity Betas (October 13, 2021). Available at SSRN: https://ssrn.com/abstract=3941752 or http://dx.doi.org/10.2139/ssrn.3941752

Emilio Barone (Contact Author)

Luiss - Guido Carli (Dpt. of Economics and Finance) ( email )

Viale Romania, 32
Rome, 00197
Italy

HOME PAGE: http://docenti.luiss.it/barone/

Gaia Barone

School of Business, National College of Ireland ( email )

Mayor Street
IFSC
Dublin, 1
Ireland

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