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Realized beta: Persistence and predictability

Torben Andersen (), Tim Bollerslev (), Francis Diebold () and Jin Wu

No 2004/16, CFS Working Paper Series from Center for Financial Studies (CFS)

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.

Keywords: quadratic variation and covariation; realized volatility; asset pricing; CAPM; equity betas; long memory; nonlinear fractional cointegration; continuous-time methods (search for similar items in EconPapers)
JEL-codes: C1 G1 (search for similar items in EconPapers)
Date: 2004
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