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Understanding Industry Betas

45 Pages Posted: 22 Feb 2013  

Lieven Baele

Tilburg University - Department of Finance

Juan M. Londono

Federal Reserve Board of Governors

Date Written: December 14, 2012


This paper models and explains the dynamics of market betas for 30 US industry portfolios between 1970 and 2009. We use DCC-MIDAS and kernel regression techniques as alternatives to the standard ex-post measures. We find betas to exhibit substantial persistence, time variation, ranking variability, and heterogeneity in their business cycle exposure. While we find only a limited amount of structural breaks in the betas of individual industries, we do identify a common structural break in March 1998. We propose two practical applications to understand the economic significance of these results. We find the cross-sectional dispersion in industry betas to be countercyclical and negatively related to future market returns. We also find DCC-MIDAS betas to outperform other beta measures in terms of limiting the downside risk and ex-post market exposure of a market-neutral minimum-variance strategy.

Keywords: industry betas, component models, kernel, DCC-MIDAS, dispersion in betas, stock return predictability, minimum variance strategies

JEL Classification: C33, E32, G12

Suggested Citation

Baele, Lieven and Londono, Juan M., Understanding Industry Betas (December 14, 2012). Available at SSRN: or

Lieven Baele (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
+31 13 466 3257 (Phone)
+31 13 466 2875 (Fax)

Juan-Miguel Londono-Yarce

Federal Reserve Board of Governors ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

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