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Where is Beta Going ? The Riskiness of Value and SmallStocks

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 SmallStocks," Post-Print halshs-00009862, HAL.
    • Handle: RePEc:hal:journl:halshs-00009862
    as

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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.

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