Payment For Risk: Constant Beta Vs. Dual‐Beta Models

Abstract

Fama and French's (1992) assertion that investors receive premium payments for risk associated with the book value to market price (BE/ME) and size and not for holding beta risk has sparked a lively debate concerning risk factors that are priced in the market. Howton and Peterson (1998) use a dual-beta model to test the Fama and French conclusions. They conclude that the significant relationship between beta and returns depends on the use of the dual-beta model. This work, however, ignores the results reported by Pettengill, Sundaram, and Mathur (PSM, 1995). PSM find a significant relation between a constant risk beta and returns when data are segmented between up and down markets, but do not consider the impact of size and BE/ME. In this paper we show that the PSM (1995) market segmentation procedure alone provides a sufficient condition to identify a significant relation between beta and returns in

Coskewness in European real estate equity returns

“…These results are persistent across all subsamples and are not dependent on the conditioning variable. They are in accordance with the findings of Pettengill (1995Pettengill ( , 2002 and the perception of beta as a risk factor.…”

“…They argue that when the excess market return is negative, an inverse relationship between cross-sectional returns and risk factors should emerge, which is supported by Pettengill et al (1995Pettengill et al ( , 2002, Fletcher (1997Fletcher ( , 2000 and Schulte et al (2011). To account for timevarying asset behaviour, the Fama-MacBeth regressions are also conducted conditionally following Pettengill et al (1995Pettengill et al ( , 2002. where is a dummy variable equal to 1, when the excess market return in month m+1 is positive and 0 if the excess market return is negative .…”

“…Pettengill et al (1995Pettengill et al ( , 2002 suggest that the inability of many asset pricing studies to establish a relationship between cross-sectional returns and risk factors (predominantly beta) results from the aggregation of positive and negative excess market return periods, when using realised returns to proxy for expected returns. They argue that when the excess market return is negative, an inverse relationship between cross-sectional returns and risk factors should emerge, which is supported by Pettengill et al (1995Pettengill et al ( , 2002, Fletcher (1997Fletcher ( , 2000 and Schulte et al (2011). To account for timevarying asset behaviour, the Fama-MacBeth regressions are also conducted conditionally following Pettengill et al (1995Pettengill et al ( , 2002.…”

“…The cross-section regressions are also conducted conditionally on whether the excess market return is positive or negative as in Pettengill et al (1995Pettengill et al ( , 2002.…”

An Empirical Investigation into the Applicability of Fama-French Three Factor Model in Explaining Portfolio Returns: Evidence from Non-Financial Firms on the Ghana Stock Exchange

“…Hence, the variation within groups is small and the statistical power to reject the null of a flat beta-return relation is low. In a follow-up study, Pettengill et al (2002) showed that the cross-sectional return premium associated with firm size was also asymmetric: the size effect is much more pronounced in down markets. They argue that the common assumption that betas are the same in up and down markets leads to an underestimation of the size effect.…”