Market Beta Research Articles

Large portfolio losses in a turbulent market

Consider a large credit portfolio of defaultable obligors in a turbulent market. Accordingly, the credit quality process of each obligor is described by a stochastic differential equation consisting of a drift term reflecting the trend, an individual volatility term reflecting the idiosyncratic risk, and a common volatility term reflecting the systematic risk. Moreover, for each obligor a market beta is used to measure its loading on the systematic risk. The obligor defaults at the first passage time of the credit quality process. We approximate the portfolio loss as the portfolio size becomes large. For the usual case where the individual defaults do not become rare, we establish a limit theorem for the portfolio loss, while for the other case where the individual defaults become rare, which is due to portfolio effect, we establish an asymptotic estimate for its tail probability. Both results show that the portfolio loss is driven by the systematic risk, while this driving force is amplified by the market beta. As an application, we derive asymptotic estimates for the value at risk and expected shortfall of the portfolio loss. Moreover, we implement intensive numerical studies to examine the accuracy of the obtained approximations and conduct some sensitivity analysis.

Individual stock sentiment beta and stock returns

Using the data in Chinese stock market, we measure the individual stock sentiment beta, which is defined as the sensitivity of individual stock returns to the individual stock sentiment changes. We demonstrate that stocks in the highest individual stock sentiment beta portfolio have significantly higher excess returns, CAPM alpha, Fama-French three-factor alpha and Fama-French five-factor alpha. Besides, we find that the high individual stock sentiment beta stocks are smaller, younger, more volatile stocks with higher price and higher market beta. After controlling for firm characteristic, the returns of High-Low individual stock sentiment beta portfolios are still significantly positive. Moreover, we show the effect of the individual stock sentiment beta on stock returns is positive and significant in different stock markets, in different sample periods, and in bull and bear market. Besides, the results of the Bayes-Stein individual stock sentiment beta are still stable.

Bull vs. Bear Oil & Gas Leveraged Exchange Traded Fund: A Rolling Risk-Performance

El objetivo de esta investigación es capturar la exposición riesgo-rendimiento de 4 ETFs de energía apalancados populares: GUSH, DRIP, DGAZ y UGAZ, que son una opción de inversión atractiva cuando el mercado de capitales (acciones y bonos específicamente) no presenta un buen desempeño debido a la incertidumbre inherente del mercado. Se utiliza un modelo de riesgo-rendimiento de ventanas móviles para estudiar la dinámica de tres de los principales componentes de inversión: volatilidad, rendimiento y beta del mercado (β) en diferentes horizontes de tiempo sobre ETF alcistas (bull) y bajistas (bear) que replican índices y commodities basadas en petróleo y gas. El ETF de energía apalancado proporciona de 200% a 300% (para bull) y -200% a -300% (para bear) de rendimiento diario a partir de su índice de referencia, permitiendo implementar estrategias donde se pueden obtener altos rendimientos (así como las altas pérdidas) a partir de la volatilidad del mercado. Los resultados permiten caracterizar la dinámica riesgo-rendimiento de los ETFs energéticos apalancados (bull y bear). En general, los ETF son un mecanismo para que los inversionistas puedan prever la estructura de precios de los energéticos, con el fin de tomar decisiones sobre una asignación eficiente de los recursos.

Estimating beta: The international evidence

Abstract This paper examines the estimation of global and local betas for a large set of Developed and Emerging international markets. Estimators based on daily data clearly outperform those based on monthly or quarterly data. For global and local market betas, the optimal window length is at roughly 24 and 12 months, respectively, for most Developed Markets. It tends to be somewhat longer for Emerging Markets. The best estimators include a double-shrinkage, a long memory (FI), and a simple combination approach. For hedging the market risk exposure in anomaly portfolios, the FI and combination estimators also perform overall best.

Predicting Equity Returns in Emerging Markets

ABSTRACT This study investigates the relation between firm-specific attributes and future equity returns in 23 emerging markets. Equal-weighted portfolio returns reveal strong evidence of short-term momentum (rather than reversal) and medium-term return momentum. We also find evidence that market beta, book-to-market ratio and downside risk metrics predict equity returns, however, these relations get weaker once value-weighting is used. In univariate regressions, smaller firms with higher idiosyncratic volatility, lottery-like characteristics and stock-specific downside risk are associated with higher future returns, however, these relations disappear in a multivariate setting. We conclude that the most robust cross-sectional effects are short- and medium-term return momentum.

Asset Pricing and Excess Returns Over the Market Return

Under the APT framework and the assumption that the market portfolio is well-diversified, if not mean-variance efficient, the common factors in raw-returns are the market return plus the common factors in the space of excess-returns over the market return. This explains why the market betas fail to explain the cross-section of expected returns in multi-factor models. Market betas cannot price assets because either they are under-identified or become unitary. However, the market portfolio is still useful for asset pricing because the empirical relevance of a multi-factor model can be tested by using excess-returns over the market return.

A New Look on Financial Markets Co-Movement through Cooperative Dynamics in Many-Body Physics.

One of the main contributions of the Capital Assets Pricing Model (CAPM) to portfolio theory was to explain the correlation between assets through its relationship with the market index. According to this approach, the market index is expected to explain the co-movement between two different stocks to a great extent. In this paper, we try to verify this hypothesis using a sample of 3.000 stocks of the USA market (attending to liquidity, capitalization, and free float criteria) by using some functions inspired by cooperative dynamics in physical particle systems. We will show that all of the co-movement among the stocks is completely explained by the market, even without considering the market beta of the stocks.

Freedom Indices and Capital Asset Pricing Model: Some Malaysian Evidence

Human rights and fundamental freedoms such as economic, political, and press freedoms vary widely from country to country. It creates opportunity and risk in investment decisions. Thus, this study is carried out to examine if the explanatory power of the model for capital asset pricing could be improved when these human rights movement indices are included in the model. The sample for this study comprises of 495 stocks listed in Bursa Malaysia, covering the sampling period from 2003 to 2013. The model applied in this study employed the pooled ordinary least square regression estimation. In addition, the robustness of the model is tested by using firm size as a controlled variable. The findings show that market beta as well as the economic and press freedom indices could explain the cross-sectional stock returns of the Malaysian stock market. By controlling the firm size, it adds marginally to the explanation of the extended CAP model which incorporated economic, political, and press freedom indices

Freedom Indices and Capital Asset Pricing Model: Some Malaysian Evidence

Human rights and fundamental freedoms such as economic, political, and press freedoms vary widely from country to country. It creates opportunity and risk in investment decisions. Thus, this study is carried out to examine if the explanatory power of the model for capital asset pricing could be improved when these human rights movement indices are included in the model. The sample for this study comprises of 495 stocks listed in Bursa Malaysia, covering the sampling period from 2003 to 2013. The model applied in this study employed the pooled ordinary least square regression estimation. In addition, the robustness of the model is tested by using firm size as a controlled variable. The findings show that market beta as well as the economic and press freedom indices could explain the cross-sectional stock returns of the Malaysian stock market. By controlling the firm size, it adds marginally to the explanation of the extended CAP model which incorporated economic, political, and press freedom indices.

Formula omitted] in the tails

Do hedge funds hedge? In negative states of the world, often not as much as they should. For several styles, we report larger market betas when market returns are low (i.e., “beta in the tails”). We justify this finding through a combination of negative-mean jumps in the market returns and large market jump betas: when moving to the left tail of the market return distribution jump dynamics dominate continuous dynamics and the overall systematic risk of the fund is driven by the higher systematic risk associated with return discontinuities. Methodologically, the separation of continuous and discontinuous dynamics is conducted by exploiting the informational content of the high-order infinitesimal cross-moments of hedge-fund and market returns.

Analysis of Systematic Risk around Firm-specific News in an Emerging Market using High Frequency Data

We investigate whether the daily betas of individual stocks vary with the release of firm-specific news in an emerging market. Using intraday prices of all stocks traded on the Borsa Istanbul, Turkey over the period 2005-2013, we find evidence that average market betas increase significantly from two weeks before the earnings announcement day, and then revert to their average levels two weeks after the announcement. The increase in betas is greater for larger, positive surprise earnings announcements than for smaller, negative news. The results are consistent with features of the learning model of Patton and Verardo (2012) but not with a number of their empirical results.

Firm location and systematic risk: the real estate channel

Purpose This paper aims to investigate whether the cyclicality of local real estate prices affects the systematic risk of local firms using a geography-based measure of land availability as a quasi-exogenous proxy for real estate price cyclicality. Design/methodology/approach This paper uses the geography-based land availability measure as a proxy for the procyclicality of real estate prices and the location of a firm’s headquarters as a proxy for the location of its real estate assets. Four-factor asset pricing model (market, size, value and momentum factors) is used to examine whether firms headquartered in more land-constrained metropolitan statistical areas have higher systematic risks. Findings The results show that real estate prices are more procyclical in areas with lower land availability and firms headquartered in these areas have higher systematic risk. This effect is more pronounced for firms with higher real estate holdings as a ratio of their tangible assets. Moreover, there are no abnormal returns to trading strategies based on land availability, consistent with stock market betas reflecting this local real estate factor. Research limitations/implications This paper contributes to the literature on local asset pricing factors, the collateral role of firms’ real estate holdings and the co-movement of security prices of geographically close firms. Practical implications This paper has important managerial implications by showing that, when firms decide on the location of their buildings (e.g. headquarters building, manufacturing plant and retail outlet), the location’s influence on systematic risk should be part of the decision-making process. Originality/value This paper is among the first to use a geography-based measure of land availability to study whether the procyclicality of local real estate prices influences firm risk independent of the procyclicality of the local economy. Thus, both the portfolio formed and firm-level analyses provide a more direct evidence of the positive relation between the procyclicality of local real estate prices and firm risk.

Beta-Anomaly: Evidence from the Indian Equity Market

The study investigates the existence of beta-anomaly in the Indian equity market. A growing body of literature shows that financial markets do not reward the risk (defined in terms of standard deviation or market beta). These results (known as ‘low-risk anomaly’ and ‘low-beta-anomaly’) are quite puzzling from the theoretical perspective. This study presents an empirical test of the capital asset pricing model (CAPM) in the Indian equity market to examine the existence of low risk/low beta anomaly. The study covers 650 actively traded stocks for a period of 189 months from July 2002 to March 2018, and the Fama–MacBeth procedure has been used for testing CAPM. The beta-shorted portfolios are formulated using both equal and value-weights. The results of the study were found robust after controlling for outliers and correcting the bias in standard errors, as suggested by Petersen (in Rev Financ Stud 22(1):435–480, 2009). We confirm the presence of ‘low-beta-anomaly’ in India. A non-linear relationship was found between CAPM beta and expected returns. This relationship follows a quadratic function, where expected returns initially increase with beta and then start declining, resulting in the negative risk premium for high-beta portfolios.

Impacto da crise econômica de 2015-2016 sobre o coeficiente beta do mercado de capitais brasileiro

Estudos empíricos têm encontrado evidências de que o risco de mercado, ou beta de mercado, tende a aumentar em períodos de crise. Dada a crise econômica brasileira de 2015-2016, o objetivo deste artigo é analisar se esta teve um impacto significativo sobre o risco de mercado das empresas brasileiras com ações negociadas na bolsa de valores brasileira (B3). Para isso, estimamos a trajetória do beta de uma carteira de ações negociadas na B3 para o período de fevereiro de 2010 a dezembro de 2018, considerando um modelo CAPM condicional em que a dinâmica de beta é dada por um processo estocástico combinado com um conjunto de variáveis condicionantes relacionadas ao ciclo econômico. Encontramos evidências de que o beta da carteira teve um aumento a partir de janeiro de 2015 e só retornou a patamares do período pré-crise a partir de março de 2018. Essas evidências estão de acordo com os resultados encontrados na literatura internacional e têm implicações importantes em termos de gerenciamento de risco.

The relevance of valuation models: insights from Palestine exchange

Purpose This paper aims to investigate the relevance of two groups of valuations models as follows: the accounting models based on the residual income (RIM) and the standard market model, on equity price, return and volatility relevance. Design/methodology/approach The models are tested on companies traded on Palestine exchange from 2009 to 2018, using panel regression analysis. Two-price and two-return models derived from RIM to compare with the market model and four volatility models. Findings The standard RIM outperformed other models in equity price modeling. The dividend discount model (DDM) outperformed the rest of the models in terms of return estimation. However, the authors find that the market model can explain equity variance better than RIM and DDM models. Practical implications For investors, market beta does not necessarily capture all relevant factors of value and traditional financial statements are still important in providing relevant information and different models are used for different values perspectives (price, return and volatility). Originality/value Previous studies focus on comparing the price and return relevance of accounting-based models (RIM and cash flow models). Three aspects differentiate this paper and contribute to its originality, namely, the uniqueness of the context, incorporating the market model into the picture along with the accounting-based models and adding Volatility dimensions of relevance.

Market and Accounting Risk Factors of Asset Pricing in the Classical and Downside Approaches

<p>Theoretical background: The variability of the company’s profitability is the result of the accompanying risk. To compare the profitability of many companies, relative profitability measures, which include profitability ratios, are more convenient. This article analyses market and accounting risk factors of CAPM. Risk was considered in variance and downside framework. Market betas, accounting betas were used in an extended version of the asset pricing model. Additionally, the influence of profitability ratios, such as ROA and ROE on the average rate of return on the capital market are considered.</p><p>Purpose of the article: The main purpose of this study is to test the standard and extended CAPM relations between systematic risk measures and mean returns for single companies quoted on the Polish capital market and equally-weighted portfolios in two approaches: variance and downside risk.</p><p>Research methods: The research based on individual securities and portfolios, compares the one-factor risk-return relationships with two-factor ones estimated using mean returns in cross-sectional regressions. The regressors were expressed in absolute terms and classical and downside beta coefficients. The sample includes companies differing in terms of size and across different industries.</p><p>Main findings: Portfolios with higher classical or downside market betas generate higher mean returns. The negative risk premium for accounting betas for variance and downside risk was identified. It is not in accordance with our earlier study of the Polish construction sector, where a positive and significant risk premium for downside accounting betas was found. The highest explanatory power of rates on returns on the Polish capital market were found for average ROA and ROE. This confirms the results of the previous studies on the Polish capital market for food and construction sectors.</p>

Beta in the tails

Do hedge funds hedge? In negative states of the world, often not as much as they should. For several styles, we report larger market betas when market returns are low (i.e., “beta in the tails”). We justify this finding through a combination of negative-mean jumps in the market returns and large market jump betas: when moving to the left tail of the market return distribution jump dynamics dominate continuous dynamics and the overall systematic risk of the fund is driven by the higher systematic risk associated with return discontinuities. Methodologically, the separation of continuous and discontinuous dynamics is conducted by exploiting the informational content of the high-order infinitesimal cross-moments of hedge-fund and market returns.

The Effect of Brand Thrust on Financial Performance of Property Companies in Indonesia Capital Market

The rapid economic growth and development encourage companies to have sustainable competitive advantage in order to compete in the market. One of the strategies to face this competition is building a good brand image. Brand has always been an important factor in company’s growth. The concept of brand thrust was used to show the level of company allocation to enhance their brand image. This study aims to examine the effect of brand thrust on financial performance of property companies in Indonesia capital market for the period 2009-2016. The independent variables used are brand thrust and firm characteristics. The dependent variable used is financial performance. The method used is panel data Ordinary Least Square (OLS) regression with the number of sample are 28 firms of property sector. This study reveals brand thrust, long term debt to assets ratio, stock market beta, market share, operating profit margins, and capital expenditure to property, plant, and equipment have a significant influence on financial performance of property companies. Keywords: brand thrust, firm characteristics, financial performance, property sector, OLS

An examination of ex ante risk and return in the cross-section using option-implied information

This paper examines cross-sectional relations between ex ante expected returns and betas. As a proxy for ex ante expected returns, we use implied returns obtained from the risk-adjusted option pricing model suggested in this paper. We find that implied returns have a positive and significant cross-sectional relation with implied betas in all maturity groups considered. This significant relation is maintained regardless of the inclusion of the well-known CAPM-anomaly variables such as firm size, book-to-market, past returns, earnings-to-price ratio, and liquidity. Ex ante market risk premium estimates have a statistical significance as well as an economic significance in that they contain significant forward-looking information on future macroeconomic conditions. Thus, market betas are priced on an ex ante basis.

Fundamental beta and portfolio performance: evidence from an emerging market

ABSTRACT The market beta is decomposed into fundamental and bubble beta to assess their effectiveness in the portfolio performance in both static and dynamic time-varying frameworks. The empirical results from India on 12 sectoral indices with NIFTY 500 as the market index establish that the portfolio constructed using the fundamental beta proportions performs better than the naïve, Markowitz mean-variance, market, and bubble beta portfolios with larger Sharpe ratio in both the static and dynamic time-varying estimates. These results open up far-reaching implications for investment analysis and contribute to the recent literature that combines fundamental analysis in the construction of portfolios.