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Realized beta: Persistence and predictability

Author

Listed:
  • Andersen, Torben G.
  • Bollerslev, Tim
  • Diebold, Francis X.
  • Wu, Jin

Abstract

A large literature over several decades reveals both extensive concern with the question of time-varying betas and an emerging consensus that betas are in fact time-varying, leading to the prominence of the conditional CAPM. Set against that background, we assess the dynamics in realized betas, vis-à-vis the dynamics in the underlying realized market variance and individual equity covariances with the market. Working in the recently-popularized framework of realized volatility, we are led to a framework of nonlinear fractional cointegration: although realized variances and covariances are very highly persistent and well approximated as fractionally-integrated, realized betas, which are simple nonlinear functions of those realized variances and covariances, are less persistent and arguably best modeled as stationary I(0) processes. We conclude by drawing implications for asset pricing and portfolio management.

Suggested Citation

  • Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Wu, Jin, 2004. "Realized beta: Persistence and predictability," CFS Working Paper Series 2004/16, Center for Financial Studies (CFS).
  • Handle: RePEc:zbw:cfswop:200416
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    References listed on IDEAS

    as
    1. Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December.
    2. Andersen, Torben G. & Bollerslev, Tim, 1997. "Intraday periodicity and volatility persistence in financial markets," Journal of Empirical Finance, Elsevier, vol. 4(2-3), pages 115-158, June.
    3. Bollerslev, Tim & Zhang, Benjamin Y. B., 2003. "Measuring and modeling systematic risk in factor pricing models using high-frequency data," Journal of Empirical Finance, Elsevier, vol. 10(5), pages 533-558, December.
    4. Andreou, Elena & Ghysels, Eric, 2002. "Rolling-Sample Volatility Estimators: Some New Theoretical, Simulation, and Empirical Results," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 363-376, July.
    5. Asger Lunde & Peter Reinhard Hansen, 2004. "Realized Variance and IID Market Microstructure Noise," Econometric Society 2004 North American Summer Meetings 526, Econometric Society.
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    Citations

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    Cited by:

    1. Jose Fernandes & Augusto Hasman & Juan Ignacio Pena, 2007. "Risk premium: insights over the threshold," Applied Financial Economics, Taylor & Francis Journals, vol. 18(1), pages 41-59.
    2. Gregory H. Bauer & Keith Vorkink, 2007. "Multivariate Realized Stock Market Volatility," Staff Working Papers 07-20, Bank of Canada.
    3. Berger, David & Chaboud, Alain & Hjalmarsson, Erik, 2009. "What drives volatility persistence in the foreign exchange market?," Journal of Financial Economics, Elsevier, vol. 94(2), pages 192-213, November.
    4. Helmut Herwartz, 2006. "Econometric analysis of high frequency data," AStA Advances in Statistical Analysis, Springer;German Statistical Society, vol. 90(1), pages 89-104, March.
    5. Levich, Richard M. & Potì, Valerio, 2015. "Predictability and ‘good deals’ in currency markets," International Journal of Forecasting, Elsevier, vol. 31(2), pages 454-472.
    6. Haselmann, Rainer & Herwartz, Helmut, 2008. "Portfolio performance and the Euro: Prospects for new potential EMU members," Journal of International Money and Finance, Elsevier, vol. 27(2), pages 314-330, March.
    7. Mbairadjim Moussa, A. & Sadefo Kamdem, J. & Shapiro, A.F. & Terraza, M., 2014. "CAPM with fuzzy returns and hypothesis testing," Insurance: Mathematics and Economics, Elsevier, vol. 55(C), pages 40-57.

    More about this item

    Keywords

    quadratic variation and covariation; realized volatility; asset pricing; CAPM; equity betas; long memory; nonlinear fractional cointegration; continuous-time methods;

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G1 - Financial Economics - - General Financial Markets

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