Torben G. Andersen () (Department of Finance, Kellogg School, Northwestern University, and NBER) Tim Bollerslev () (Departments of Economics and Finance, Duke University, and NBER) Francis X. Diebold () (Departments of Economics, Finance and Statistics, University of Pennsylvania, and NBER) Jin Wu () (Department of Economics, University of Pennsylvania)
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A large literature over several decades reveals both extensive concern with the question of time-varying betas and an emerging consensus that betas are in fact time-varying, leading to the prominence of the conditional CAPM. Set against that background, we assess the dynamics in realized betas, vis-à-vis the dynamics in the underlying realized market variance and individual equity covariances with the market. Working in the recently-popularized framework of realized volatility, we are led to a framework of nonlinear fractional cointegration: although realized variances and covariances are very highly persistent and well approximated as fractionally-integrated, realized betas, which are simple nonlinear functions of those realized variances and covariances, are less persistent and arguably best modeled as stationary I(0) processes. We conclude by drawing implications for asset pricing and portfolio management.
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Paper provided by Center for Financial Studies in its series CFS Working Paper Series with number
2004/16.
Length: 65 pages Date of creation: 16 Jan 2004 Date of revision: Handle: RePEc:cfs:cfswop:wp200416
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Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Jin Wu, 2003.
"Realized Beta: Persistence and Predictability,"
PIER Working Paper Archive
04-018, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 01 Mar 2004.
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Find related papers by JEL classification: C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General G1 - Financial Economics - - General Financial Markets
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