Beta: The Good, the Bad, and the Ugly

Joost Driessen; J. van Zundert

doi:10.2139/ssrn.3012675

Beta: The Good, the Bad, and the Ugly

Research output: Working paper › Other research output

Abstract

This paper decomposes aggregate and individual stock returns into cash flow news, interest rate news, and risk premium news. We then extend the “good beta, bad beta” approach of Campbell and Vuolteenaho (2004) by allowing for a third beta: exposure to interest rate news. Using various stock portfolio sorts, we find that interest rate betas carry a higher price of risk than the betas for cash flow news and risk premium news. We also find that interest rate news explains over 1/3rd of all variation in stock market returns, and that interest rates negatively affect future risk premiums.

Original language	English
Publisher	SSRN
Number of pages	64
DOIs	https://doi.org/10.2139/ssrn.3012675
Publication status	Published - Nov 2017

Keywords

beta
interest rates
stocks
VAR model

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10.2139/ssrn.3012675

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abstract = "This paper decomposes aggregate and individual stock returns into cash flow news, interest rate news, and risk premium news. We then extend the “good beta, bad beta” approach of Campbell and Vuolteenaho (2004) by allowing for a third beta: exposure to interest rate news. Using various stock portfolio sorts, we find that interest rate betas carry a higher price of risk than the betas for cash flow news and risk premium news. We also find that interest rate news explains over 1/3rd of all variation in stock market returns, and that interest rates negatively affect future risk premiums.",

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AB - This paper decomposes aggregate and individual stock returns into cash flow news, interest rate news, and risk premium news. We then extend the “good beta, bad beta” approach of Campbell and Vuolteenaho (2004) by allowing for a third beta: exposure to interest rate news. Using various stock portfolio sorts, we find that interest rate betas carry a higher price of risk than the betas for cash flow news and risk premium news. We also find that interest rate news explains over 1/3rd of all variation in stock market returns, and that interest rates negatively affect future risk premiums.

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KW - stocks

KW - VAR model

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Beta: The Good, the Bad, and the Ugly

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Keywords

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