Time-Varying Betas and Asymmetric Effect of News: Empirical Analysis of Blue Chip Stocks

42 Pages Posted: 23 Feb 2000 Last revised: 13 Oct 2010

See all articles by Young-Hye Cho

Young-Hye Cho

affiliation not provided to SSRN

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: September 1999

Abstract

We investigate whether or not a beta increases with bad news and decreases with good news, just as does volatility. Using daily returns for nine stocks in a double beta model with EGARCH specifications, we show that news asymmetrically affects the betas of individual stocks. We find that betas depend on two source of news: market shocks and idiosyncratic shocks. Some stock betas depend on both while others depend on one. We categorize each stock return as belonging to one of three beta process models, a joint, an idiosyncratic, and a market model based on the role of market shocks and idiosyncratic shocks. Our conclusions differ from those of Brown, Nelson, and Sunnier (1995) who worked with monthly aggregated data in a bivariate EGARCH model. We believe that stock price aggregation in this previous research resulted in a loss of cross sectional variation and consequently lead to weak results. If the asymmetric effect is more readily apparent in daily data, then this may again explain previous researchers' inability to detect asymmetric effects. Our findings shed light on the controversy as to whether abnormalities in stock returns result from overreaction to information or from changes in expected returns in an efficient market. Finding an asymmetric effect in betas leads us to conclude that abnormalities can, at least partially, be explained by changes in expected returns through a change in beta.

Suggested Citation

Cho, Young-Hye and Engle, Robert F., Time-Varying Betas and Asymmetric Effect of News: Empirical Analysis of Blue Chip Stocks (September 1999). NBER Working Paper No. w7330. Available at SSRN: https://ssrn.com/abstract=196388

Young-Hye Cho (Contact Author)

affiliation not provided to SSRN

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
145
Abstract Views
2,884
rank
204,465
PlumX Metrics