Dynamic Conditional Beta is Alive and Well in the Cross-Section of Daily Stock Returns
Turan G. Bali
Georgetown University - Robert Emmett McDonough School of Business
Robert F. Engle
New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance
Fordham University - School of Business
October 8, 2012
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, C13working papers series
Date posted: June 23, 2012 ; Last revised: October 8, 2012
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