Where do Betas Come From? Asset Price Dynamics and the Sources of Systematic Risk

John Campbell, Jianping Mei

NBER Working Paper No. 4329
Issued in April 1993
NBER Program(s):The Asset Pricing Program

This paper breaks assets' betas with common factors into components attributable to news about future cash flows, real interest rates, and excess returns. To achieve this decomposition the paper uses a vector autoregressive time-series model and an approximate log-linear present value relation. The betas of industry and size portfolios with the market are largely attributed to changing expected returns. Betas with inflation and industrial production reflect opposing cash flow and expected return effects. The paper also shows how asset pricing theory restricts the expected excess return components of betas.

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Document Object Identifier (DOI): 10.3386/w4329

Published: Review of Financial Studies. vol 6, no. 3, 1993, p. 567-592

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