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Bad Beta, Good Beta

John Campbell () and Tuomo Vuolteenaho

No 9509, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper explains the size and value anomalies' in stock returns using an economically motivated two-beta model. We break the CAPM 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 poor performance of the CAPM since 1963 is explained by the fact that growth stocks and high-past-beta stocks have predominantly good betas with low risk prices.

JEL-codes: G12 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-fmk
Date: 2003-02
Note: AP
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Published as Campbell, Johny. and Tuomo Vuolteenaho. "Bad Beta, Good Beta," American Economic Review, 2004, v94(5,Dec), 1249-1275.

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