Bad Beta, Good Beta

John Y. Campbell () and Tuomo Vuolteenaho

No 1971, Harvard Institute of Economic Research Working Papers from Harvard - Institute of Economic Research

Abstract: This paper explains the size and value “anomalies†in stock returns using an economically motivated two-beta model. We break the beta 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 post- 1963 negative CAPM alphas of growth stocks are explained by the fact that their betas are predominantly of the good variety.

Date: 2002
View citations in EconPapers

Downloads: (external link)
http://www.economics.harvard.edu/pub/hier/2002/HIER1971.pdf (application/pdf)

Related works:
Working Paper: Bad Beta, Good Beta (2003)
Working Paper: Bad Beta, Good Beta (2003)
Journal Article: Bad Beta, Good Beta (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Access Statistics for this paper

More papers in Harvard Institute of Economic Research Working Papers from Harvard - Institute of Economic Research
Contact information at EDIRC.
Series data maintained by Thomas Krichel ().