Daily Data is Bad for Beta: Opacity and Frequency-Dependent Betas

Review of Asset Pricing Studies, Forthcoming

55 Pages Posted: 18 Mar 2012 Last revised: 21 Dec 2013

Thomas Gilbert

University of Washington - Department of Finance and Business Economics

Christopher M. Hrdlicka

University of Washington - Michael G. Foster School of Business

Jonathan Kalodimos

Oregon State University - College of Business

Stephan Siegel

University of Washington - Michael G. Foster School of Business; CESifo

Date Written: December 20, 2013

Abstract

A stock's market exposure, beta, is not the same when measured across different return frequencies. Sorting stocks on the difference between low and high frequency betas (dBeta) yields large systematic mispricings relative to the CAPM at high frequencies, but significantly smaller mispricings at low frequencies. This result occurs even in large and liquid stocks and remains after applying standard beta measurement corrections. We provide a risk-based explanation for the frequency dependence of betas and alphas by introducing uncertainty about the effect of systematic news on firm value (opacity) into an otherwise frictionless rational expectations equilibrium model with risk-averse investors. Empirically, we document a robust relationship between the frequency dependence of betas and proxies for opacity. Our results suggest that opacity poses significant challenges to using betas estimated from high-frequency returns. Contrary to the conventional wisdom that the CAPM can hold at high frequencies and more factors are needed to price assets at low frequencies, we show that the CAPM may be an appropriate asset pricing model at low frequencies but that additional factors, such as one based on opacity, are necessary at high frequencies.

Keywords: Asset pricing models, systematic risk, factor structure, return frequency, information, price discovery, beta measurement

JEL Classification: G10, G12, G14

Suggested Citation

Gilbert, Thomas and Hrdlicka, Christopher M. and Kalodimos, Jonathan and Siegel, Stephan, Daily Data is Bad for Beta: Opacity and Frequency-Dependent Betas (December 20, 2013). Review of Asset Pricing Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2023970 or http://dx.doi.org/10.2139/ssrn.2023970

Thomas Gilbert (Contact Author)

University of Washington - Department of Finance and Business Economics ( email )

Box 353200
Seattle, WA 98195
United States
206-616-7184 (Phone)

HOME PAGE: http://faculty.washington.edu/gilbertt/

Christopher M. Hrdlicka

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195
United States
206.616.0332 (Phone)
206.542.7472 (Fax)

Jonathan Kalodimos

Oregon State University - College of Business ( email )

Corvallis, OR 97331
United States

Stephan Siegel

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

HOME PAGE: http://faculty.washington.edu/ss1110/

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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