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Time-Varying Beta and the Value Premium

  • Hui Guo, Chaojiang Wu and Yan Yu


We model conditional market beta and alpha as flexible functions of state variables identified via a formal variable-selection procedure. In the post-1963 sample, the beta of the value premium comoves strongly with unemployment, inflation, and the price–earnings ratio in a countercyclical manner. We also uncover a novel nonlinear dependence of alpha on business conditions: It falls sharply and even becomes negative during severe economic downturns but is positive and flat otherwise. The conditional capital asset pricing model (CAPM) performs better than the unconditional CAPM, but this does not fully explain the value premium. Our findings are consistent with a conditional CAPM with rare disasters.


Corresponding author

* Guo (corresponding author),, Lindner College of Business, University of Cincinnati and Research Center of Applied Finance, Dongbei University of Finance and Economics; Yu,, Lindner College of Business, University of Cincinnati; and Wu,, LeBow College of Business, Drexel University.


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We thank an anonymous referee, Hendrik Bessembinder (the editor), and Stefan Nagel for helpful comments. Guo acknowledges financial support from the Key Projects of the National Social Science Foundation of China (No. 16ZDA039).



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