Beta Risk in the Cross-section of Equities

Ali Boloorforoosh, Peter Christoffersen, Mathieu Fournier*, Christian Gourieroux

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

We develop a conditional capital asset pricing model in continuous time that allows for stochastic beta exposure. When beta comoves with market variance and the stochastic discount factor (SDF), beta risk is priced, and the expected return on a stock deviates from the security market line. The model predicts that low-beta stocks earn high returns, because their beta positively comoves with market variance and the SDF. The opposite is true for high-beta stocks. Estimating the model on equity and option data, we find that beta risk explains expected returns on low- and high-beta stocks, resolving the "betting against beta" anomaly. Authors have furnished code and an Internet Appendix , which are available on the Oxford University Press Web site next to the link to the final published paper online.
Original languageEnglish
JournalReview of Financial Studies
Volume33
Issue number9
Pages (from-to)4318-4366
Number of pages49
ISSN0893-9454
DOIs
Publication statusPublished - 2020

Cite this

Boloorforoosh, A., Christoffersen, P., Fournier, M., & Gourieroux, C. (2020). Beta Risk in the Cross-section of Equities. Review of Financial Studies, 33(9), 4318-4366. https://doi.org/10.1093/rfs/hhz139