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RFS Advance Access published online on April 22, 2009
Review of Financial Studies, doi:10.1093/rfs/hhp029
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© The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Growth or Glamour? Fundamentals and Systematic Risk in Stock Returns

John Y. Campbell
Department of Economics, Harvard University, and NBER

Christopher Polk
Department of Finance, London School of Economics

Tuomo Vuolteenaho
Arrowstreet Capital

Send correspondence to John Y. Campbell, Department of Economics, Littauer Center, Harvard University, Cambridge, MA 02138; telephone: 617-496-6448. E-mail: john_campbell{at}harvard.edu. Christopher Polk, Department of Finance, London School of Economics, London WC2A 2AE, UK. E-mail: c.polk{at}lse.ac.uk. Tuomo Vuolteenaho, Arrowstreet Capital, LP, 200 Clarendon St., 30th Floor, Boston, MA 02116; fax: 617-495-7730. E-mail: tvuolteenaho{at}arrowstreetcapital.com.

JEL Classification: G12, G14, N22


  Abstract

The cash flows of growth stocks are particularly sensitive to temporary movements in aggregate stock prices, driven by shocks to market discount rates, while the cash flows of value stocks are particularly sensitive to permanent movements, driven by shocks to aggregate cash flows. Thus, the high betas of growth (value) stocks with the market's discount-rate (cash-flow) shocks are determined by the cash-flow fundamentals of growth and value companies. Growth stocks are not merely "glamour stocks" whose systematic risks are purely driven by investor sentiment. More generally, the systematic risks of individual stocks with similar accounting characteristics are primarily driven by the systematic risks of their fundamentals.

We are grateful to Campbell Harvey and an anonymous referee for helpful comments on an earlier version. This material is based upon work supported by the National Science Foundation under grant no. 0214061 to Campbell.


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