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Dynamic Conditional Beta is Alive and Well in the Cross-Section of Daily Stock ReturnsTuran G. BaliGeorgetown University - Robert Emmett McDonough School of Business Robert F. EngleNew York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance Yi TangFordham University - School of Business October 8, 2012 Abstract: This paper investigates the significance of dynamic conditional beta in predicting the cross-sectional variation in expected stock returns. The results indicate that the time-varying conditional beta is alive and well in the cross-section of daily stock returns. Portfolio-level analyses and firm-level cross-sectional regressions indicate a positive and significant relation between dynamic conditional beta and future returns on individual stocks. An investment strategy that goes long stocks in the highest conditional beta decile and shorts stocks in the lowest conditional beta decile produces average returns and alphas of 8% per annum. These results are robust to controls for size, book-to-market, momentum, short-term reversal, liquidity, co-skewness, idiosyncratic volatility, and preference for lottery-like assets.
Number of Pages in PDF File: 71 Keywords: Dynamic conditional beta, conditional CAPM, ICAPM, expected stock returns JEL Classification: G10, G11, C13 working papers seriesDate posted: June 23, 2012 ; Last revised: October 8, 2012Suggested CitationContact Information
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