Working Paper: NBER ID: w9509
Authors: John Y. Campbell; Tuomo Vuolteenaho
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.
Keywords: No keywords provided
JEL Codes: G12; G14; N22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cash flow betas (G12) | higher average returns of value stocks (G12) |
| discount rate betas (E43) | lower average returns of growth stocks (G17) |
| cash flow shocks (F32) | market returns (G19) |
| discount rate shocks (E43) | market returns (G19) |
| bad cash flow beta and good discount rate beta (H43) | required return on a stock (G12) |
| two-beta model (C46) | explanatory power of asset pricing theories (G12) |