The classic estimates of CAPM equity betas are notoriously unstable. We suppose that this is mainly due to changes of firm’s leverage over time. In order to take leverage into account, we propose a new approach where asset correlations among firms are pairwise constant, while equity correlations depend on the stochastic evolution of firms’ asset values.
Deleveraging CAPM: Asset Betas vs. Equity Betas / Barone, Gaia. - (2016).
Deleveraging CAPM: Asset Betas vs. Equity Betas
BARONE, GAIA
2016
Abstract
The classic estimates of CAPM equity betas are notoriously unstable. We suppose that this is mainly due to changes of firm’s leverage over time. In order to take leverage into account, we propose a new approach where asset correlations among firms are pairwise constant, while equity correlations depend on the stochastic evolution of firms’ asset values.
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