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Realized Beta GARCH: A Multivariate GARCH Model with Realized Measures of Volatility and CoVolatility

  • Peter R. Hansen

    ()

    (Stanford University, Department of Economics and CREATES)

  • Asger Lunde

    ()

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

  • Valeri Voev

    ()

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

We introduce a multivariate GARCH model that utilizes and models realized measures of volatility and covolatility. The realized measures extract information contained in high-frequency data that is particularly beneficial during periods with variation in volatility and covolatility. Applying the model to market returns in conjunction with an individual asset yields a model for the conditional regression coefficient, known as the beta. We apply the model to a set of highly liquid stocks and find that conditional betas are much more variable than usually observed with rolling-window OLS regressions with dailty data. In the empirical part of the paper we examine the cross-sectional as well as the time variation of the conditional beta series. The model links the conditional and realized second moment measures in a self-contained system of equations, making it amenable to extensions and easy to estimate. A multi-factor extension of the model is briefly discussed.

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Paper provided by Department of Economics and Business Economics, Aarhus University in its series CREATES Research Papers with number 2010-74.

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Length: 19
Date of creation: 29 Nov 2010
Date of revision:
Handle: RePEc:aah:create:2010-74
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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  11. Lewellen, Jonathan & Nagel, Stefan, 2006. "The conditional CAPM does not explain asset-pricing anomalies," Journal of Financial Economics, Elsevier, vol. 82(2), pages 289-314, November.
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  18. Peter Reinhard Hansen & Zhuo Huang, 2012. "Exponential GARCH Modeling with Realized Measures of Volatility," Economics Working Papers ECO2012/26, European University Institute.
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  23. O. E. Barndorff-Nielsen & P. Reinhard Hansen & A. Lunde & N. Shephard, 2009. "Realized kernels in practice: trades and quotes," Econometrics Journal, Royal Economic Society, vol. 12(3), pages C1-C32, November.
  24. Hansen, Bruce E., 1992. "Testing for parameter instability in linear models," Journal of Policy Modeling, Elsevier, vol. 14(4), pages 517-533, August.
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  27. Peter Reinhard Hansen & Zhuo Huang & Howard Howan Shek, 2012. "Realized GARCH: a joint model for returns and realized measures of volatility," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 27(6), pages 877-906, 09.
  28. Viktor Todorov & Tim Bollerslev, 2007. "Jumps and Betas: A New Framework for Disentangling and Estimating Systematic Risks," CREATES Research Papers 2007-15, Department of Economics and Business Economics, Aarhus University.
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