Realized betas and the cross-section of expected returns

Claudio Morana

Applied Financial Economics, 2009, vol. 19, issue 17, 1371-1381

Abstract: What explains the cross section of expected returns for the 25 size/value Fama-French (FF) portfolios? It is found that modelling time-varying betas is important to explain the cross section of expected returns, as well as to comply with the time series restriction on Jensen-alpha. Support for a modified version of the conditional Jagannathan and Wang's (1996) Capital Asset Pricing Model (CAPM) is found, where implementation is carried out in the realized beta framework proposed in this article. About 63% of the cross-sectional variability of the expected returns for the 25 FF size and value sorted portfolios is then found to be explained by this parsimonious two-variable model.

Date: 2009
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Working Paper: Realized Betas and the Cross-Section of Expected Returns (2008)
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DOI: 10.1080/09603100802599597

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