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CAPM, components of beta and the cross section of expected returns

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  • Cenesizoglu, Tolga
  • Reeves, Jonathan J.

Abstract

This paper demonstrates that a conditional version of the Capital Asset Pricing Model (CAPM) explains the cross section of expected returns, just as well as the three factor model of Fama and French. This is achieved by measuring beta (systematic risk) with short-, medium- and long-run components. The short-run component of beta is computed from daily returns over the prior year, while the medium-run beta component is from daily returns over the prior 5 years, and the long-run component from monthly returns over the prior 10 years.

Suggested Citation

  • Cenesizoglu, Tolga & Reeves, Jonathan J., 2018. "CAPM, components of beta and the cross section of expected returns," Journal of Empirical Finance, Elsevier, vol. 49(C), pages 223-246.
    • Handle: RePEc:eee:empfin:v:49:y:2018:i:c:p:223-246
    DOI: 10.1016/j.jempfin.2018.10.002
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    Cited by:

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    2. Knápek, J. & Starý, O. & Vávrová, K. & Bemš, J. & Weger, J. & Horák, M., 2024. "Modelling the impact of business risk on the competitiveness of purpose-grown biomass of annual and perennial crops," Renewable and Sustainable Energy Reviews, Elsevier, vol. 202(C).
    3. Guglielmo Maria Caporale & Luis A. Gil-Alana & Miguel Martin-Valmayor, 2020. "Persistence in the Realized Betas: Some Evidence for the Spanish Stock Market," CESifo Working Paper Series 8171, CESifo.
    4. Guglielmo Maria Caporale & Luis A. Gil-Alana & Miguel Martin-Valmayor, 2024. "Persistence in the Realized Betas: Some Evidence from the Stock Market," JRFM, MDPI, vol. 17(4), pages 1-28, April.
    5. Asgharian, Hossein & Christiansen, Charlotte & Hou, Ai Jun & Wang, Weining, 2021. "Long- and short-run components of factor betas: Implications for stock pricing," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).

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    More about this item

    Keywords

    Asset pricing; Systematic risk; Realized beta; Component models;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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