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Jumps and Betas: A New Framework for Disentangling and Estimating Systematic Risks

CREATES Research Paper No. 2007-15

37 Pages Posted: 23 Jun 2008  

Viktor Todorov

Independent

Tim Bollerslev

Duke University - Finance; Duke University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: August 16, 2007

Abstract

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.

Keywords: Factor models, systematic risk, common jumps, high-frequency data, realized variation

JEL Classification: C13, C14, G10, G12

Suggested Citation

Todorov, Viktor and Bollerslev, Tim, Jumps and Betas: A New Framework for Disentangling and Estimating Systematic Risks (August 16, 2007). CREATES Research Paper No. 2007-15. Available at SSRN: https://ssrn.com/abstract=1150066 or http://dx.doi.org/10.2139/ssrn.1150066

Viktor Todorov (Contact Author)

Independent

No Address Available

Tim Bollerslev

Duke University - Finance ( email )

Durham, NC 27708-0120
United States
919-660-1846 (Phone)
919-684-8974 (Fax)

Duke University - Department of Economics

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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