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Beta Risk in the Cross-Section of Equities

Author

Listed:
  • Ali Boloorforoosh
  • Peter Christoffersen
  • Mathieu Fournier
  • Christian Gouriéroux
  • Stijn Van Nieuwerburgh

Abstract

We develop a conditional capital asset pricing model in continuous time that allows for stochastic beta exposure. When beta comoves with market variance and the stochastic discount factor (SDF), beta risk is priced, and the expected return on a stock deviates from the security market line. The model predicts that low-beta stocks earn high returns, because their beta positively comoves with market variance and the SDF. The opposite is true for high-beta stocks. Estimating the model on equity and option data, we find that beta risk explains expected returns on low- and high-beta stocks, resolving the “betting against beta” anomaly.Authors have furnished code and an Internet Appendix, which are available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Ali Boloorforoosh & Peter Christoffersen & Mathieu Fournier & Christian Gouriéroux & Stijn Van Nieuwerburgh, 2020. "Beta Risk in the Cross-Section of Equities," The Review of Financial Studies, Society for Financial Studies, vol. 33(9), pages 4318-4366.
    • Handle: RePEc:oup:rfinst:v:33:y:2020:i:9:p:4318-4366.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhz139
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    Cited by:

    1. Bradrania, Reza & Veron, Jose Francisco, 2023. "The beta anomaly in the Australian stock market and the lottery demand," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    2. Gaetano Bua & Daniele Marazzina, 2021. "On the application of Wishart process to the pricing of equity derivatives: the multi-asset case," Computational Management Science, Springer, vol. 18(2), pages 149-176, June.
    3. Bradrania, Reza & Veron, Jose Francisco & Wu, Winston, 2023. "The beta anomaly and the quality effect in international stock markets," Journal of Behavioral and Experimental Finance, Elsevier, vol. 38(C).

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