Conditional Relationship Between Beta and Return in the US Stock Market
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Bing Xiao: Université d’Auvergne, France
Expert Journal of Business and Management, 2016, vol. 4, issue 1, 46-55
According to the CAPM, risk is measured by the beta, and the relation between required expected return and beta is linear. This paper examines the conditional relationship between beta and return in the US stock market. The conditional covariances and variances used to estimate beta are modeled as an ARCH process. The beta return relationship is tested upon the sign of the excess market return. The implication of the sign of the excess market return follows Morelli (2011). This study shows the importance of recognizing the sign of the excess market return when testing the beta-return relationship. The approach also allows us to distinguish the size effect and the effect of economic cycles.
Keywords: Conditional beta; Market risk premium; ARCH models; US stock market (search for similar items in EconPapers)
JEL-codes: C52 G1 G10 G12 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:exp:bsness:v:4:y:2016:i:1:p:46-55
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