Jumps and Betas: A New Framework for Disentangling and Estimating Systematic Risks
Duke University - Finance; Duke University - Department of Economics; National Bureau of Economic Research (NBER)
August 16, 2007
CREATES Research Paper No. 2007-15
We provide a new theoretical framework for disentangling and estimating sensitivity towards systematic diffusive and jump risks in the context of factor pricing models. Our estimates of the sensitivities towards systematic risks, or betas, are based on the notion of increasingly finer sampled returns over fixed time intervals. In addition to establishing consistency of our estimators, we also derive Central Limit Theorems characterizing their asymptotic distributions. In an empirical application of the new procedures using high-frequency data for forty individual stocks and an aggregate market portfolio, we find the estimated diffusive and jump betas with respect to the market to be quite different for many of the stocks. Our findings have direct and important implications for empirical asset pricing finance and practical portfolio and risk management decisions.
Number of Pages in PDF File: 37
Keywords: Factor models, systematic risk, common jumps, high-frequency data, realized variation
JEL Classification: C13, C14, G10, G12
Date posted: June 23, 2008
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