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; Centre for International Finance and Regulation (CIFR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance
Fordham University - School of Business
March 1, 2014
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 takes a long position in stocks in the highest conditional beta decile and a short position in 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: 68
Keywords: Dynamic conditional beta, conditional CAPM, ICAPM, expected stock returns
JEL Classification: G10, G11, C13working papers series
Date posted: June 23, 2012 ; Last revised: March 18, 2014
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