Realized Beta: Persistence and Predictability

Torben G. Andersen; Tim Bollerslev; Francis X. Diebold; Ginger Wu

doi:10.1016/S0731-9053(05)20020-8

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Advances in Econometrics

ISSN: 0731-9053
Series editor(s): Thomas B. Fomby, R. Carter Hill, Ivan Jeliazkov, Juan Carlos Escanciano and Eric Hillebrand

Subject Area: Economics

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Realized Beta: Persistence and Predictability

Document Information:
Title:	Realized Beta: Persistence and Predictability
Author(s):	Torben G. Andersen, Tim Bollerslev, Francis X. Diebold, Ginger Wu
Volume:	20 Editor(s): Thomas B. Fomby, Dek Terrell ISBN: 978-0-76231-273-3 eISBN: 978-1-84950-388-4
Citation:	Torben G. Andersen, Tim Bollerslev, Francis X. Diebold, Ginger Wu (2006), Realized Beta: Persistence and Predictability, in Thomas B. Fomby, Dek Terrell (ed.) Econometric Analysis of Financial and Economic Time Series (Advances in Econometrics, Volume 20), Emerald Group Publishing Limited, pp.1-39
DOI:	10.1016/S0731-9053(05)20020-8 (Permanent URL)
Publisher:	Emerald Group Publishing Limited
Article type:	Chapter Item
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.