Beta Risk in the Cross-section of Equities

Ali Boloorforoosh, Peter Christoffersen, Mathieu Fournier, Christian Gourieroux

Research output: Working paperResearch

Abstract

We develop a bivariate stochastic volatility model that allows for dynamic market exposure. The expected return on a stock depends on beta's co-movement 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 for a large number of firms we find that allowing for beta risk helps explain the expected returns on low and high beta stocks that are challenging for standard factor models. Overall, we find strong evidence that accounting for beta risk results in better model fit.
Original languageEnglish
Place of PublicationToronto
PublisherRotman School of Management, University of Toronto
Number of pages52
DOIs
Publication statusPublished - Mar 2017
SeriesRotman School of Management Working Paper
Number2926511

Keywords

  • Factor models
  • Stochastic beta
  • Option-implied beta
  • Wishart processes

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