Beta Risk in the Cross-section of Stocks and Options

Ali Boloorforoosh, Peter Christoffersen, Mathieu Fournier, Christian Gourieroux

Research output: Working paperResearch

Abstract

In order to study beta risk, we develop a multivariate stochastic volatility model in which individual equity and market returns co-vary stochastically. In the model, the stochastic covariance matrix of an individual equity return with the market follows a bivariate Wishart process and the associated beta risk is priced. We estimate the model on returns and options jointly for a large cross-section of stocks. When analyzing the modelís empirical performance, we Önd that it outperforms the standard rolling regression approach that is prevalent in empirical asset pricing.
Original languageEnglish
Place of PublicationMontreal
PublisherInstitut de la Finance Structurée et des Instruments Dérivés de Montréal
Number of pages67
Publication statusPublished - Oct 2016
SeriesIFSID Working Paper
Number16-09

Keywords

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

Cite this

Boloorforoosh, A., Christoffersen, P., Fournier, M., & Gourieroux, C. (2016). Beta Risk in the Cross-section of Stocks and Options. Montreal: Institut de la Finance Structurée et des Instruments Dérivés de Montréal. IFSID Working Paper, No. 16-09