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Forecasting Beta Using Conditional Heteroskedastic Models

By Andrew Bentley

Conventional measurements of equity return volatility rely on the asset’s previous day closing price to infer the current level of volatility and fail to incorporate information concerning intraday influntuctuations. Realized measures of volatility, such as the realized variance, are able to integrate intraday information by utilizing high-frequency data to form a very accurate measure of the asset’s return volatility. These measures can be used in parallel with the traditional definition of the Capital Asset Pricing Model (CAPM) beta to better predict the time-varying systematic risk of an asset. In this analysis, realized measures were added to the General Autoregressive Conditional Heteroskedastic (GARCH) framework to form a predictive model of beta that can quickly respond to rapid changes in the level of volatility. The ndings suggest that this predictive beta is better able to explain the stylized characteristics of beta and is a more accurate forecast of the realized beta than the GARCH model or the benchmark Autoregressive Moving-Average (ARMA) model used as a comparison.

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JEL Codes: C0, C3, C03, C32, C53, C58 | Tagged: Beta, GARCH, GARCHX, High-Frequency Data, Realized Varience

Examination of Time-Variant Asset Correlations Using High- Frequency Data

By Mingwei Lei

Drawing motivation from the 2007-2009 global financial crises, this paper looks to further examine the potential time-variant nature of asset correlations. Specifically, high frequency price data and its accompanying tools are utilized to examine the relationship between asset correlations and market volatility. Through further analyses of this relationship using linear regressions, this paper presents some significant results that provide striking evidence for the time-variability of asset correlations. These findings have crucial implications for portfolio managers as well as risk management professionals alike, especially in the contest of diversification.

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Advisor: George Tauchen | JEL Codes: G, G1, G10, G11, G14 | Tagged: Asset correlations, Diversification, Financial Crisis, High-Frequency Data, Market Volatility, Time-Variant Correlations, Time-Variant Volatility

Beta Estimation Using High Frequency Data

By Angela Ryu

Using high frequency stock price data in estimating nancial measures often causes serious distortion. It is due to the existence of the market microstructure noise, the lag of the observed price to the underlying value due to market friction. The adverse eect of the noise can be avoided by choosing an appropriate sampling frequency. In this study, using mean square error as the measure of accuracy in beta estimation, the optimal pair of sampling frequency and the trailing window was empirically found to be as short as 1 minute and 1 week, respectively. This surprising result may be due to the low market noise resulting from its high liquidity and the econometric properties of the errors-in-variables model. Moreover, the realized beta obtained from the optimal pair outperformed the constant beta from the CAPM when overnight returns were excluded. The comparison further strengthens the argument that the underlying beta is time-varying.

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Advisor: George Tauchen | JEL Codes: C51, C58, G17 | Tagged: Beta estimation, Beta Trailing Window, High-Frequency Data, Market Microstructure Noise, Optimal Sampling Interval, Realized Beta

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