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Roughing up Beta: Continuous vs. Discontinuous Betas, and the Cross-Section of Expected Stock Returns

Author

Listed:
  • Tim Bollerslev

    () (Duke University, NBER and CREATES)

  • Sophia Zhengzi Li

    () (Michigan State University)

  • Viktor Todorov

    () (Northwestern University and CREATES)

Abstract

Motivated by the implications from a stylized equilibrium pricing framework, we investigate empirically how individual equity prices respond to continuous, or \smooth," and jumpy, or \rough," market price moves, and how these different market price risks, or betas, are priced in the cross-section of expected returns. Based on a novel highfrequency dataset of almost one-thousand individual stocks over two decades, we find that the two rough betas associated with intraday discontinuous and overnight returns entail significant risk premiums, while the intraday continuous beta is not priced in the cross-section. An investment strategy that goes long stocks with high jump betas and short stocks with low jump betas produces significant average excess returns. These higher risk premiums for the discontinuous and overnight market betas remain significant after controlling for a long list of other firm characteristics and explanatory variables previously associated with the cross-section of expected stock returns.

Suggested Citation

  • Tim Bollerslev & Sophia Zhengzi Li & Viktor Todorov, 2014. "Roughing up Beta: Continuous vs. Discontinuous Betas, and the Cross-Section of Expected Stock Returns," CREATES Research Papers 2014-48, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:create:2014-48
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    Cited by:

    1. Jiri Novak, 2015. "Systematic Risk Changes, Negative Realized Excess Returns and Time-Varying CAPM Beta," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 65(2), pages 167-190, April.
    2. repec:oup:jfinec:v:15:y:2017:i:1:p:106-138. is not listed on IDEAS
    3. Oh, Dong Hwan & Patton, Andrew J., 2016. "High-dimensional copula-based distributions with mixed frequency data," Journal of Econometrics, Elsevier, vol. 193(2), pages 349-366.

    More about this item

    Keywords

    Market price risks; jump betas; high-frequency data; cross-sectional return variation;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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