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

Tim Bollerslev, Sophia Zhengzi Li () and Viktor Todorov ()
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Sophia Zhengzi Li: Michigan State University, Postal: Department of Finance, Eli Broad College of Business, Michigan State University, East Lansing, MI 48824, USA
Viktor Todorov: Northwestern University and CREATES, Postal: Department of Finance, Kellogg School of Management, 2001 Sheridan Road, Evanston, IL 60208, USA

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

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.

Keywords: Market price risks; jump betas; high-frequency data; cross-sectional return variation (search for similar items in EconPapers)
JEL-codes: C13 C14 G11 G12 (search for similar items in EconPapers)
Pages: 55
Date: 2014-12-04
New Economics Papers: this item is included in nep-mst and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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