Realized Beta: Persistence and Predictability
AbstractA 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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Bibliographic InfoPaper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 04-018.
Length: 63 pages
Date of creation: 03 Jan 2003
Date of revision: 01 Mar 2004
Quadratic variation and covariation; realized volatility; asset pricing; CAPM; equity betas; long memory; nonlinear fractional cointegration; continuous-time methods;
Other versions of this item:
- C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
- G1 - Financial Economics - - General Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-01-02 (All new papers)
- NEP-ECM-2005-01-02 (Econometrics)
- NEP-ETS-2005-01-02 (Econometric Time Series)
- NEP-FIN-2005-01-02 (Finance)
- NEP-FMK-2005-01-02 (Financial Markets)
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