Dynamic Conditional Beta is Alive and Well in the Cross-Section of Daily Stock Returns

55 Pages Posted: 23 Jun 2012 Last revised: 15 Apr 2016

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; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Yi Tang

Fordham University - Gabelli School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: April 2016

Abstract

This paper presents evidence for a significantly positive link between the dynamic conditional beta and the cross-section of daily stock returns. 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 in the range of 0.60% to 0.80% per month. We provide an investor attention based explanation of this finding. We show that stocks with high conditional beta have strong attention-grabbing characteristics, leading to higher fraction of buyer-initiated trades for these stocks. We also find that stocks recently bought perform significantly better than stocks recently sold. Hence, the high beta stocks that investors are more likely to buy have higher expected returns than the low beta stocks that investors are more likely to sell.

Keywords: Dynamic conditional beta, conditional CAPM, ICAPM, investor attention, buying intensity, and expected stock returns

JEL Classification: G10, G11, C13

Suggested Citation

Bali, Turan G. and Engle, Robert F. and Tang, Yi, Dynamic Conditional Beta is Alive and Well in the Cross-Section of Daily Stock Returns (April 2016). Available at SSRN: https://ssrn.com/abstract=2089636 or http://dx.doi.org/10.2139/ssrn.2089636

Turan G. Bali (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
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(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: http://msbonline.georgetown.edu/faculty-research/msf-faculty/turan-bali

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

Yi Tang

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10023
United States

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