Beta Risk in the Cross-Section of Equities

70 Pages Posted: 3 Mar 2017 Last revised: 27 Dec 2017

Ali Boloorforoosh

Concordia University; TD Asset Management

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; University of Aarhus - CREATES

Mathieu Fournier

HEC Montreal

Christian Gourieroux

University of Toronto - Department of Economics; Center for Interuniversity Research and Analysis on Organization (CIRANO); Ecole Nationale de la Statistique et de l'Administration Economique (ENSAE); National Bureau of Economic Research (NBER)

Date Written: December 23, 2017

Abstract

We develop a continuous-time intertemporal CAPM model that allows for risky beta exposure, which we explicitly specify. In the model, the expected return on a stock depends on beta's co-movement with market variance and more generally with the stochastic discount factor and deviates from the standard security market line when beta risk is priced. When estimating the model on returns and options we find that allowing for beta risk helps explain the expected returns on the low and high beta stocks, which are challenging for standard factor models.

Keywords: Factor models, stochastic beta, option-implied beta, Wishart processes

JEL Classification: G10, G12, G13

Suggested Citation

Boloorforoosh, Ali and Christoffersen, Peter and Fournier, Mathieu and Gourieroux, Christian, Beta Risk in the Cross-Section of Equities (December 23, 2017). Rotman School of Management Working Paper No. 2926511. Available at SSRN: https://ssrn.com/abstract=2926511 or http://dx.doi.org/10.2139/ssrn.2926511

Ali Boloorforoosh

Concordia University ( email )

John Molson School of Business
1455 de Maisonnuve Blvd. W
Montreal, Quebec H3G 1M8
Canada
5142965877 (Phone)

HOME PAGE: http://aliboloor.com

TD Asset Management ( email )

1350 René-Lévesque Blvd W
Suite 501
Montreal, Quebec H3G 1T4
Canada
(514) 2890635 (Phone)

Peter Christoffersen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
Canada
416-946-5511 (Phone)

HOME PAGE: http://www.christoffersen.com

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

University of Aarhus - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Mathieu Fournier (Contact Author)

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3 H3T 2A7
Canada

Christian Gourieroux

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada
416-978-4349 (Phone)
416-978-6713 (Fax)

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

2020 rue University, 25th Floor
Montreal, Quebec H3C 3J7
Canada

Ecole Nationale de la Statistique et de l'Administration Economique (ENSAE) ( email )

15 Boulevard Gabriel Peri
92245 Malakoff Cedex
France
33.4117.7666 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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