Sampling interval and estimated betas: Implications for the presence of transitory components in stock prices

Pierre Perron, Sungju Chun () and Cosme Vodounou

Journal of Empirical Finance, 2013, vol. 20, issue C, 42-62

Abstract: We provide a theoretical framework to explain the empirical finding that the estimated betas are sensitive to the sampling interval even when using continuously compounded returns. We suppose that stock prices have both permanent and transitory components. The discrete time representation of the beta depends on the sampling interval and two components labeled “permanent and transitory betas”. We show that if no transitory component is present in stock prices then no sampling interval effect occurs. However, the presence of a transitory component implies that the beta is an increasing (decreasing) function of the sampling interval for more (less) risky assets. In our framework, assets are labeled risky if their “permanent beta” is greater than their “transitory beta” and vice versa for less risky assets. Simulations show that our theoretical results provide good approximations for the estimated betas in small samples. We provide empirical evidence about the presence of negative serial correlation and mean reversion in the returns of the portfolios considered. We discuss why our model is better able to provide an explanation for this sampling interval effect than other models in the literature.

Keywords: Mean reversion; CAPM; Stock returns; Transitory components; Firm size; Continuous time models (search for similar items in EconPapers)
JEL-codes: C12 C22 C58 G12 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Sampling Interval and Estimated Betas: Implications for the Presence of Transitory Components in Stock Prices (2011)
Working Paper: Sampling Interval and estimated Betas: Implications for the Presence of Transitory Components in Stock Prices (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:20:y:2013:i:c:p:42-62

DOI: 10.1016/j.jempfin.2012.10.002

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