Growth or Glamour? Fundamentals and Systematic Risk in Stock Returns

49 Pages Posted: 6 Jul 2005 Last revised: 16 Aug 2010

See all articles by John Y. Campbell

John Y. Campbell

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

Christopher Polk

London School of Economics

Tuomo Vuolteenaho

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

Multiple version iconThere are 3 versions of this paper

Date Written: June 2005

Abstract

The cash flows of growth stocks are particularly sensitive to temporary movements in aggregate stock prices (driven by movements in the equity risk premium), while the cash flows of value stocks are particularly sensitive to permanent movements in aggregate stock prices (driven by market-wide shocks to cash flows.) Thus the high betas of growth stocks with the market's discount-rate shocks, and of value stocks with the market's cash-flow shocks, are determined by the cash-flow fundamentals of growth and value companies. Growth stocks are not merely "glamour stocks" whose systematic risks are purely driven by investor sentiment. More generally, accounting measures of firm-level risk have predictive power for firms' betas with market-wide cash flows, and this predictive power arises from the behavior of firms' cash flows. The systematic risks of stocks with similar accounting characteristics are primarily driven by the systematic risks of their fundamentals.

Suggested Citation

Campbell, John Y. and Polk, Christopher and Vuolteenaho, Tuomo, Growth or Glamour? Fundamentals and Systematic Risk in Stock Returns (June 2005). NBER Working Paper No. w11389, Available at SSRN: https://ssrn.com/abstract=734045

John Y. Campbell (Contact Author)

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Christopher Polk

London School of Economics ( email )

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Tuomo Vuolteenaho

Arrowstreet Capital, LP ( email )

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National Bureau of Economic Research (NBER)

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