Beta (finance) | EPFL Graph Search

In finance, the beta (β or market beta or beta coefficient) is a statistic that measures the expected increase or decrease of an individual stock price in proportion to movements of the Stock market as a whole. Beta can be used to indicate the contribution of an individual asset to the market risk of a portfolio when it is added in small quantity. It is referred to as an asset's non-diversifiable risk, systematic risk, or market risk. Beta is not a measure of idiosyncratic risk. Interpretation of values By definition, the value-weighted average of all market-betas of all investable assets with respect to the value-weighted market index is 1. If an asset has a beta above (below) 1, it indicates that its return moves more (less) than 1-to-1 with the return of the market-portfolio, on average. In practice, few stocks have negative betas (tending to go up when the market goes down). Most stocks have betas between 0 and 3. Treasury bills (like most fixed income instrumen

Corporate Finance, Asset Returns, and Credit Risk

Philip Valta

This dissertation consists of three chapters. The first chapter empirically investigates how the intensity of product market competition affects the cost of debt. Using a large sample of loans to publicly traded US manufacturing firms, the chapter provides evidence that an intensification of product market competition among firms significantly increases the cost of bank loans. The analysis reveals that the effect is strongest in industries with high illiquidity and specificity of assets. This finding indicates that the liquidation value of assets is an important channel through which competition affects the cost of debt. Moreover, loans to firms that operate in more competitive industries contain more covenants restricting the firms' financing and dividend policies. Overall, the results suggest that banks explicitly take into account the risk arising from product market competition when pricing and designing debt contracts. The second chapter tests whether equity risk reflects the shareholders' incentives to default strategically on the firm's debt obligations. The chapter develops a model that relates shareholders' incentives to default strategically with the likelihood that debt renegotiations fail. Using an international cross-section of stocks to exploit the exogenous variation of insolvency procedures across countries and to test the model's predictions, the analysis reveals that the equity beta increases with the degree of creditor protection. Moreover, the equity beta decreases with the costs of liquidation and shareholders' bargaining power, and the sensitivity of this relationship weakens as country's creditor protection toughens. The results are economically important, and robust to various specifications and estimation techniques. The third chapter investigates how the debt structure and the strategic interaction between shareholders and creditors in the event of default affect expected stock returns. By endogenizing shareholders' decision to default, the model generates new predictions linking firm characteristics to expected stock returns through an intuitive economic mechanism. In particular, the model predicts that expected stock returns are higher for firms that face high debt renegotiation difficulties, and that have a large fraction of secured or convertible debt. Expected stock returns are lower for firms whose shareholders maintain strong bargaining power, and for firms subject to high liquidation costs. Using a large sample of publicly traded US firms between 1985 and 2005, the third chapter presents new evidence on the link between debt structure, renegotiation frictions, and stock returns, which is supportive of the model's predictions.

EPFL2010

Non-myopic betas

Semyon Malamud

An overlapping generations model with investors having heterogeneous investment horizons leads to a two-factor asset pricing model. The risk premiums are determined by the exposure to the market (myopic betas) and the future return on the efficient portfolio (non-myopic betas), which is identified nonparametrically from equilibrium. Non-myopic betas are priced in the cross-section of stocks, producing increasing and economically significant risk-return relation. In the model with funding constraints, low non-myopic beta stocks deliver higher risk-adjusted returns. Empirically, a betting against non-myopic beta portfolio generates superior performance relative to common factor models and is negatively correlated with the market betting against beta portfolio.

2018

Corporate Finance, Asset Returns, and Credit Risk

Philip Valta

EPFL2010