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Time-Varying Betas and Asymmetric Effect of News: Empirical Analysis of Blue Chip Stocks

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  • Young-Hye Cho
  • Robert F. Engle

Abstract

We investigate whether or not a beta increases with bad news and decreases with good news, just as does volatility. Using daily returns for nine stocks in a double beta model with EGARCH specifications, we show that news asymmetrically affects the betas of individual stocks. We find that betas depend on two source of news: market shocks and idiosyncratic shocks. Some stock betas depend on both while others depend on one. We categorize each stock return as belonging to one of three beta process models, a joint, an idiosyncratic, and a market model based on the role of market shocks and idiosyncratic shocks. Our conclusions differ from those of Brown, Nelson, and Sunnier (1995) who worked with monthly aggregated data in a bivariate EGARCH model. We believe that stock price aggregation in this previous research resulted in a loss of cross sectional variation and consequently lead to weak results. If the asymmetric effect is more readily apparent in daily data, then this may again explain previous researchers' inability to detect asymmetric effects. Our findings shed light on the controversy as to whether abnormalities in stock returns result from overreaction to information or from changes in expected returns in an efficient market. Finding an asymmetric effect in betas leads us to conclude that abnormalities can, at least partially, be explained by changes in expected returns through a change in beta.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7330.

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Date of creation: Sep 1999
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Handle: RePEc:nbr:nberwo:7330

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Cited by:
  1. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Heiko Ebens, 2000. "The Distribution of Stock Return Volatility," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 00-27, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. Nilsson, Birger, 2002. "International Asset Pricing and the Benefits from World Market Diversification," Working Papers, Lund University, Department of Economics 2002:1, Lund University, Department of Economics.
  3. Jose L. B. Fernandes & Augusto Hasman & Juan Ignacio Peña, 2006. "Risk Premium: Insights Over The Threshold," Business Economics Working Papers, Universidad Carlos III, Departamento de Economía de la Empresa wb062808, Universidad Carlos III, Departamento de Economía de la Empresa.
  4. Olan T. Henry & Nilss Olekalns & Kalvinder Shields, 2004. "Time Variation And Asymmetry In The World Price Of Covariance Risk: The Implications For International Diversification," Department of Economics - Working Papers Series, The University of Melbourne 907, The University of Melbourne.
  5. Virginia Liu & Francis Tapon & Yiguo Sun, 2006. "Stock return volatility and the internet phenomenon," Applied Financial Economics Letters, Taylor and Francis Journals, Taylor and Francis Journals, vol. 2(2), pages 105-109, March.
  6. Kiseok Nam & Sei-Wan Kim & Augustine. Arize, 2006. "Mean Reversion of Short-Horizon Stock Returns: Asymmetry Property," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 26(2), pages 137-163, March.
  7. Giorgio Canarella & Stephen M. Miller & Stephen K. Pollard, 2009. "Dynamic Stock Market Interactions between the Canadian, Mexican, and the United States Markets: The NAFTA Experience," Working Papers, University of Nevada, Las Vegas , Department of Economics 0905, University of Nevada, Las Vegas , Department of Economics.
  8. John M. Maheu & Thomas H. McCurdy, 2003. "News Arrival, Jump Dynamics and Volatility Components for Individual Stock Returns," CIRANO Working Papers, CIRANO 2003s-38, CIRANO.
  9. Bollerslev, Tim & Zhang, Benjamin Y. B., 2003. "Measuring and modeling systematic risk in factor pricing models using high-frequency data," Journal of Empirical Finance, Elsevier, Elsevier, vol. 10(5), pages 533-558, December.
  10. Abdul Qayyum & Muhammad Arshad Khan, 2014. "Dynamic Relationship and Volatility Spillover between the Stock Market and the Foreign Exchange Market in Pakistan: Evidence from VAR-EGARCH Modelling," PIDE-Working Papers, Pakistan Institute of Development Economics 2014:103, Pakistan Institute of Development Economics.
  11. Abdul Qayyum & A. R. Kemal, 2006. "Volatility Spillover between the Stock Market and the Foreign Market in Pakistan," PIDE-Working Papers, Pakistan Institute of Development Economics 2006:7, Pakistan Institute of Development Economics.
  12. Attiya Y. Javid & Eatzaz Ahmad, 2008. "The Conditional Capital Asset Pricing Model: Evidence from Karachi Stock Exchange," PIDE-Working Papers, Pakistan Institute of Development Economics 2008:48, Pakistan Institute of Development Economics.
  13. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Ebens, Heiko, 2001. "The distribution of realized stock return volatility," Journal of Financial Economics, Elsevier, Elsevier, vol. 61(1), pages 43-76, July.
  14. Rossignolo, Adrian F. & Fethi, Meryem Duygun & Shaban, Mohamed, 2012. "Value-at-Risk models and Basel capital charges," Journal of Financial Stability, Elsevier, Elsevier, vol. 8(4), pages 303-319.
  15. Charles S. Bos & Phillip Gould, 2007. "Dynamic Correlations and Optimal Hedge Ratios," Tinbergen Institute Discussion Papers, Tinbergen Institute 07-025/4, Tinbergen Institute.

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