Duration‐adjusted betas. Issue 2 (11th August 2021)

• Record Type: Journal Article
• Authors: Varela, Oscar
• Is Part Of: Review of financial economics. Volume 40:Issue 2(2022)
• Page Start: 168
• Page End: 173
• Publication Date: 2021-08-11
• Subjects: beta -- duration -- stock price; Business -- Periodicals; Economics -- Periodicals; Business; Economics; Electronic journals; Periodicals; 332.05
• DOI: 10.1002/rfe.1144
• Languages: English
• ISSNs: 1058-3300

Abstract

Abstract: This paper proposes duration‐adjusted betas for the three‐factor model betas that include risk associated with the firm's dividend policy. It extends Varela ( Journal of Portfolio Management, 41, 2015, 122) who shows dividend policy as relevant to the stock's risk even in perfect markets, because the stock's duration is lower when cash dividends are higher. The three‐factor model's betas measure the effects of the market portfolio, size, and value premiums on the stock's required return. The stock's duration measures its required return's effects on its price. In combination, adjusting the stock's three‐factor betas for duration accounts not only for the effects of each factor on its required return, but also for the effect of the required return on its price. Overall, investors seeking lower risks, that is lower duration‐adjusted betas, should consider firms with policies that promote higher cash dividends.