Authors: Semyon Malamud (Swiss Finance Institute and CEPR, EPF Lausanne), Grigory Vilkov (Frankfurt School of Finance and Management)
Title: Non-Myopic Betas
We introduce non-myopic mean-variance optimizing agents into the standard conditional CAPM. In equilibrium, the inter-temporal hedging demand of non-myopic investors leads to a two-factor CAPM in which risk premiums are determined both by the market portfolio beta (the myopic beta) and by the non-myopic beta of returns with respect to the return on the future mean-variance efficient portfolio. We show empirically that the new risk factor is priced in the cross-section of stock returns, and the link between expected returns and non-myopic betas is monotonically increasing. The model makes several predictions about equilibrium beta dynamics that are confirmed by the data. Using a cross-section of mutual fund returns, we find that their non-myopic betas explain a significant part of the variation in mutual fund performance, suggesting that non-myopic behavior is an important component of performance generation.