Bayesian Analysis of Stochastic Betas

49 Pages Posted: 26 Apr 2004

See all articles by Gergana Jostova

Gergana Jostova

George Washington University - Department of Finance

Alexander Philipov

George Mason University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: September 24, 2005

Abstract

We propose a mean-reverting stochastic process for the market beta. In a simulation study, the proposed model generates significantly more precise beta estimates than GARCH betas, betas conditioned on aggregate or firm-level variables, and rolling-regression betas, even when the true betas are generated based on these competing specifications. Our model significantly improves out-of-sample hedging effectiveness. In asset-pricing tests, our model provides substantially stronger support for the conditional CAPM relative to competing beta models and helps resolve asset-pricing anomalies such as the size, book-to-market, and idiosyncratic volatility effects in the cross-section of stock returns.

Keywords: Stochastic beta, time-varying systematic risk, asset-pricing anomalies, hedging

JEL Classification: G10, G12, G14

Suggested Citation

Jostova, Gergana and Philipov, Alexander, Bayesian Analysis of Stochastic Betas (September 24, 2005). AFA 2005 Philadelphia Meetings, Forthcoming. Available at SSRN: https://ssrn.com/abstract=535282 or http://dx.doi.org/10.2139/ssrn.535282

Gergana Jostova (Contact Author)

George Washington University - Department of Finance ( email )

2201 G St NW
Funger Hall, Suite 501
Washington, DC 20052
United States
202-994-7478 (Phone)

HOME PAGE: http://home.gwu.edu/~jostova

Alexander Philipov

George Mason University - Department of Finance ( email )

Fairfax, VA 22030
United States

HOME PAGE: http://mason.gmu.edu/~aphilipo

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