Investor Expectations, Business Conditions, and the Pricing of Beta-Instability Risk

William Goetzmann, Akiko Watanabe and Masahiro Watanabe

Yale School of Management Working Papers from Yale School of Management

Abstract: This paper examines the pricing implications of time-variation in assets' market betas over the business cycle in a conditional CAPM framework. We use a half century of real GDP growth expectations from economists' surveys to determine forecasted economic states. This approach largely avoids the confounding effects of econometric forecasting model error. The expectation measure forecasts the market return controlling for existing predictive variables. The loadings on the expectation measure explain a significant fraction of cross-sectional variation in stock returns. A fully tradable, ex ante mimicking portfolio generates positive risk-adjusted returns during good economic times over four decades.

Keywords: conditional CAPM; beta-instability risk; value and growth betas; time-varying premium; business cycle; Livingston Survey; investor expectations (search for similar items in EconPapers)
Date: 2008-03-01, Revised 2009-01-01
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Persistent link: https://EconPapers.repec.org/RePEc:ysm:wpaper:amz2656

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