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Jumps and Betas: A New Framework for Disentangling and Estimating Systematic Risks

  • Viktor Todorov
  • Tim Bollerslev

    ()

    (School of Economics and Management, University of Aarhus, Denmark and CREATES)

We provide a new theoretical framework for disentangling and estimating sensitivity towards systematic diffusive and jump risks in the context of factor pricing models. Our estimates of the sensitivities towards systematic risks, or betas, are based on the notion of increasingly finer sampled returns over fixed time intervals. In addition to establish- ing consistency of our estimators, we also derive Central Limit Theorems characterizing their asymptotic distributions. In an empirical application of the new procedures using high-frequency data for forty individual stocks and an aggregate market portfolio, we find the estimated diffusive and jump betas with respect to the market to be quite dif- ferent for many of the stocks. Our findings have direct and important implications for empirical asset pricing finance and practical portfolio and risk management decisions.

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Paper provided by Department of Economics and Business Economics, Aarhus University in its series CREATES Research Papers with number 2007-15.

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Length: 35
Date of creation: 16 Aug 2007
Date of revision:
Handle: RePEc:aah:create:2007-15
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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