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Understanding Industry Betas

Lieven Baele

Tilburg University - Department of Finance

Juan M. Londono

Federal Reserve Board of Governors

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.

Number of Pages in PDF File: 45

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

JEL Classification: C33, E32, G12

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Date posted: February 22, 2013  

Suggested Citation

Baele, Lieven and Londono, Juan M., Understanding Industry Betas (December 14, 2012). Available at SSRN: https://ssrn.com/abstract=2216542 or http://dx.doi.org/10.2139/ssrn.2216542

Contact Information

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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