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Dynamic Conditional Beta is Alive and Well in the Cross-Section of Daily Stock Returns

Author

Listed:
  • Turan G. Bali

    () (McDonough School of Business, Georgetown University)

  • Robert F. Engle

    () (New York University Stern School of Business)

  • Yi Tang

    () (Schools of Business, Fordham University)

Abstract

This paper investigates the significance of dynamic conditional beta in predicting the cross-sectional variation in expected stock returns. The results indicate that the time-varying conditional beta is alive and well in the cross-section of daily stock returns. Portfolio-level analyses and firm-level cross-sectional regressions indicate a positive and significant relation between dynamic conditional beta and future returns on individual stocks. An investment strategy that goes long stocks in the highest conditional beta decile and shorts stocks in the lowest conditional beta decile produces average returns and alphas of 8% per annum. These results are robust to controls for size, book-tomarket, momentum, short-term reversal, liquidity, co-skewness, idiosyncratic volatility, and preference for lottery-like assets.

Suggested Citation

  • Turan G. Bali & Robert F. Engle & Yi Tang, 2013. "Dynamic Conditional Beta is Alive and Well in the Cross-Section of Daily Stock Returns," Koç University-TUSIAD Economic Research Forum Working Papers 1305, Koc University-TUSIAD Economic Research Forum.
  • Handle: RePEc:koc:wpaper:1305
    as

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    File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1305.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Dynamic conditional beta; conditional CAPM; ICAPM; and expected stock returns.;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General

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