We study the cross-section of expected returns in a framework where the CAPM holds either conditionally or unconditionally and dividend dynamics determine market betas. Calibrating the discount factor and aggregate dividends allows matching standard features of aggregate stock market returns and the market price-to-dividend ratio. In the calibration, we see signicant fluctuations in market betas due to both aggregate and individual shocks. These results explain, on the one hand, why stock characteristics contain considerable power in predicting returns. On the other hand, they are consistent with empirical failures of the unconditional CAPM, even in our framework when it holds conditionally.

Paper : "Beta"