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Andersen, Torben G.
Bollerslev, Tim
Diebold, Francis X.
Wu, Jin
Year of Publication: 
Series/Report no.: 
CFS Working Paper 2004/16
A large literature over several decades reveals both extensive concern with the question of time-varying betas and an emerging consensus that betas are in fact time-varying, leading to the prominence of the conditional CAPM. Set against that background, we assess the dynamics in realized betas, vis-à-vis the dynamics in the underlying realized market variance and individual equity covariances with the market. Working in the recently-popularized framework of realized volatility, we are led to a framework of nonlinear fractional cointegration: although realized variances and covariances are very highly persistent and well approximated as fractionally-integrated, realized betas, which are simple nonlinear functions of those realized variances and covariances, are less persistent and arguably best modeled as stationary I(0) processes. We conclude by drawing implications for asset pricing and portfolio management.
quadratic variation and covariation
realized volatility
asset pricing
equity betas
long memory
nonlinear fractional cointegration
continuous-time methods
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Working Paper

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