Torben G. Andersen () (Department of Economics, Northwestern University) Tim Bollerslev () (Department of Economics, Duke University) Francis X. Diebold () (Department of Economics, University of Pennsylvania) 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 Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number
04-018.
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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