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Where is Beta Going ? The Riskiness of Value and Small Stocks

Author

Listed:
  • Francesco Franzoni

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper finds that the market betas of value and small stocks have decreased by about 75% in the second half of the twentieth century. The path of beta can be closely tracked using conditioning variables that summarize the state of the economy. On the basis of this analysis, the decline in beta can be related to a long-term improvement in economic conditions that made these companies less risky. Decomposing beta into the cash flow and expected return news components confirms that the payoffs of these companies are less sensitive to market conditions. This finding has implications for the debate on the CAPM anomalies. The failure to account for time-series variation of beta in unconditional CAPM regressions can explain as much as 30% of the value premium. In some samples, about 80% of the value premium can be explained by assuming that investors tied their expectations of the riskiness of these stocks to the high values of beta prevailing in the early years.

Suggested Citation

  • Francesco Franzoni, 2006. "Where is Beta Going ? The Riskiness of Value and Small Stocks," Post-Print halshs-00125691, HAL.
    • Handle: RePEc:hal:journl:halshs-00125691
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    Citations

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    Cited by:

    1. Peng Huang & C. James Hueng, 2009. "Interest-rate risk factor and stock returns: a time-varying factor-loadings model," Applied Financial Economics, Taylor & Francis Journals, vol. 19(22), pages 1813-1824.
    2. T.G. Saji, 2018. "Predicting Market Betas," Paradigm, , vol. 22(2), pages 160-174, December.
    3. John Y. Campbell, 2008. "Viewpoint: Estimating the equity premium," Canadian Journal of Economics, Canadian Economics Association, vol. 41(1), pages 1-21, February.
    4. Kizys, Renatas & Pierdzioch, Christian, 2011. "The changing sensitivity of realized portfolio betas to U.S. output growth: An analysis based on real-time data," Journal of Economics and Business, Elsevier, vol. 63(3), pages 168-186, May.
    5. Cooper, Michael J. & Gubellini, Stefano, 2011. "The critical role of conditioning information in determining if value is really riskier than growth," Journal of Empirical Finance, Elsevier, vol. 18(2), pages 289-305, March.
    6. Stefano Gubellini, 2014. "Conditioning information and cross-sectional anomalies," Review of Quantitative Finance and Accounting, Springer, vol. 43(3), pages 529-569, October.

    More about this item

    Keywords

    Beta; Riskiness; risk; Value; Small Stocks;
    All these keywords.

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