The Conditional Beta and the Cross-Section of Expected Returns |
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| Authors: | Turan G Bali Nusret Cakici† Yi Tang‡ |
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| Institution: | Turan G. Bali is the David Krell Chair Professor of Finance at the University of New York in New York NY, and Visiting Professor of Finance at Koc University, Turkey.;Nusret Cakici is a Professor of Finance at Fordham University in New York, NY.;Yi Tang is an Assistant Professor of Finance at Fordham University in New York, NY. |
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| Abstract: | We examine the cross-sectional relation between conditional betas and expected stock returns for a sample period of July 1963 to December 2004. Our portfolio-level analyses and the firm-level cross-sectional regressions indicate a positive, significant relation between conditional betas and the cross-section of expected returns. The average return difference between high- and low-beta portfolios ranges between 0.89% and 1.01% per month, depending on the time-varying specification of conditional beta. After controlling for size, book-to-market, liquidity, and momentum, the positive relation between market beta and expected returns remains economically and statistically significant. |
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