RESEARCH

FERNANDO CHAGUE

Ph.D. candidate

Department of Economics

University of North Carolina at Chapel Hill

 

 

Job Market Paper

 

Conditional Betas: Asymmetric Responses to Good and Bad News

 

Abstract

 

Several parametric and non-parametric estimators of conditional betas have been suggested by the econometric literature. The conditional CAPM does not provide any structure on how betas should vary and it is not clear which estimator should be preferred. In this paper we fill this gap by investigating the economic structure imposed by a rational expectations equilibrium model on conditional betas. We show that uncertainty about the state of the economy combined with different cash-flow structures, like those implied by value and growth portfolios, result in very distinct dynamics of conditional betas. Furthermore, the same forces driving volatility asymmetry result in excess covariance during market downturns for cyclical assets and in asymmetric responses of conditional betas to news. In particular, the market betas of value portfolios increase more with negative news than with positive news.