TY  - JOUR
AU  - Santos,Tano
AU  - Veronesi,Pietro
TI  - Conditional Betas
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10413
PY  - 2004
Y2  - April 2004
UR  - http://www.nber.org/papers/w10413
L1  - http://www.nber.org/papers/w10413.pdf
N1  - Author contact info:
Tano Santos
Graduate School of Business
Columbia University
3022 Broadway, Uris Hall 414
New York, NY  10027
Tel: 212/854-0489
Fax: 212/316-9180
E-Mail: js1786@columbia.edu

Pietro Veronesi
University of Chicago
Booth School of Business
5807 South Woodlawn Avenue
Chicago, IL  60637
Tel: 773/702-6348
Fax: 773/702-0458
E-Mail: pietro.veronesi@chicagobooth.edu
AB  - Empirical evidence shows that conditional market betas vary substantially over time. Yet, little is known about the source of this variation, either theoretically or empirically. Within a general equilibrium model with multiple assets and a time varying aggregate equity premium, we show that conditional betas depend on (a) the level of the aggregate premium itself; (b) the level of the firm's expected dividend growth; and (c) the firm's fundamental risk, that is, the one pertaining to the covariation of the firm's cash-flows with the aggregate economy. Especially when fundamental risk (c) is strong, the model predicts that market betas should display a large time variation, that their cross-sectional dispersion should be negatively related to the aggregate premium, and that investments in physical capital should be positively related to changes in betas. These predictions find considerable support in the data.
ER  -