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Understanding industry betas

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  • Baele, Lieven
  • Londono, Juan M.

Abstract

This paper models and explains the dynamics of market betas for 30 US industry portfolios between 1970 and 2009. We use DCC–MIDAS and kernel regression techniques as alternatives to the standard ex-post measures. We find betas to exhibit substantial persistence, time variation, ranking variability, and heterogeneity in their business cycle exposure. While we find only a limited amount of structural breaks in the betas of individual industries, we do identify a common structural break in March 1998. We propose two practical applications to understand the economic significance of these results. We find the cross-sectional dispersion in industry betas to be countercyclical and negatively related to future market returns. We also find DCC–MIDAS betas to outperform other beta measures in terms of limiting the downside risk and ex-post market exposure of a market-neutral minimum-variance strategy.

Suggested Citation

  • Baele, Lieven & Londono, Juan M., 2013. "Understanding industry betas," Journal of Empirical Finance, Elsevier, vol. 22(C), pages 30-51.
  • Handle: RePEc:eee:empfin:v:22:y:2013:i:c:p:30-51
    DOI: 10.1016/j.jempfin.2013.02.003
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    References listed on IDEAS

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    1. repec:eee:ecmode:v:66:y:2017:i:c:p:139-145 is not listed on IDEAS
    2. repec:eee:finlet:v:22:y:2017:i:c:p:249-258 is not listed on IDEAS

    More about this item

    Keywords

    Industry betas; Component models; DCC–MIDAS; Dispersion in betas; Stock return predictability; Minimum variance strategies;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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