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The Relation Between Expected Returns and Betas

Paper Session

Friday, Jan. 4, 2019 2:30 PM - 4:30 PM

Hilton Atlanta, Grand Ballroom B
Hosted By: American Finance Association
  • Chair: Daniel Andrei, University of California-Los Angeles

Asset Pricing Anomalies and the Low-risk Puzzle

Ruomeng Liu
,
University of Nebraska - Lincoln

Abstract

The original observation in Black, Jensen and Scholes (1972) that the security market line is too flat - the beta anomaly - is a driving force behind a number of well-documented cross-sectional asset pricing puzzles. I document that returns to a broad set of anomaly portfolios are negatively correlated with the contemporaneous market excess returns. I show that this negative covariance implicitly embeds the beta anomaly in these cross-sectional return puzzles. Taking into account the exposure to beta anomaly attenuates the economic and statistical significance of the risk-adjusted returns to a large set of asset pricing anomalies.

The Macroeconomic Announcement Premium

Jessica Wachter
,
University of Pennsylvania
Yicheng Zhu
,
University of Pennsylvania

Abstract

Empirical studies demonstrate striking patterns in stock market returns in relation to scheduled macroeconomic announcements. First, a large proportion of the total equity premium is realized on days with macroeconomic announcements, despite the small number of such days. Second, the relation between market betas and expected returns is far stronger on announcement days as compared with non-announcement days. Finally, these results hold for fixed-income investments as well as for stocks. We present a model with rare events that jointly explains these phenomena. In our model, which is solved in closed form, agents learn about a latent disaster probability from scheduled announcements. We quantitatively account for the empirical findings, along with other facts about the market portfolio.

Asset Pricing: A Tale of Night and Day

Terrence Hendershott
,
University of California-Berkeley
Dmitry Livdan
,
University of California-Berkeley
Dominik Roesch
,
University at Buffalo

Abstract

Stock prices behave very differently with respect to their sensitivity to market risk (beta) when markets are open for trading versus when they are closed. The capital asset pricing model (CAPM) performs poorly overall as beta is weakly related to 24-hour returns. This is driven entirely by trading-day returns, i.e., open-to-close returns are negatively related to beta in the cross section. The CAPM holds overnight when the market is closed. The CAPM holds overnight for the U.S. and internationally for: beta-sorted portfolios, 10 industry and 25 book-to-market portfolios, cash-flow and discount-rate beta-sorted portfolios, and individual stocks. These results are consistent with transitory beta-related price effects at the open and the close.
Discussant(s)
Scott Cederburg
,
University of Arizona
Hengjie Ai
,
University of Minnesota
Pavel Savor
,
Temple University
JEL Classifications
  • G1 - General Financial Markets