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Daily Data is Bad for Beta: Opacity and Frequency-Dependent Betas

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  • Thomas Gilbert
  • Christopher Hrdlicka
  • Jonathan Kalodimos
  • Stephan Siegel

Abstract

A stock’s market exposure, beta, varies across return frequencies. Sorting stocks on the difference between low- and high-frequency betas (Δβ) yields large systematic mispricings relative to the CAPM at high frequencies, but significantly smaller mispricings at low frequencies. We provide a risk-based explanation for this frequency dependence by introducing uncertainty about the effect of systematic news on firm value (opacity) into a frictionless model. We document a robust relationship between the frequency dependence of betas and proxies for opacity. Our findings suggest that opacity poses significant challenges to using betas estimated from high-frequency returns. While the CAPM may be an appropriate asset pricing model at low frequencies, additional factors, e.g., based on opacity, are necessary at high frequencies.

Suggested Citation

  • Thomas Gilbert & Christopher Hrdlicka & Jonathan Kalodimos & Stephan Siegel, 2014. "Daily Data is Bad for Beta: Opacity and Frequency-Dependent Betas," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 4(1), pages 78-117.
    • Handle: RePEc:oup:rasset:v:4:y:2014:i:1:p:78-117.
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    File URL: http://hdl.handle.net/10.1093/rapstu/rau001
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    Cited by:

    1. Bandi, Federico M. & Chaudhuri, Shomesh E. & Lo, Andrew W. & Tamoni, Andrea, 2021. "Spectral factor models," Journal of Financial Economics, Elsevier, vol. 142(1), pages 214-238.
    2. González, Mariano & Nave, Juan & Rubio, Gonzalo, 2018. "Macroeconomic determinants of stock market betas," Journal of Empirical Finance, Elsevier, vol. 45(C), pages 26-44.
    3. Tolga Cenesizoglu & Denada Ibrushi, 2020. "Predicting Systematic Risk With Macroeconomic And Financial Variables," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 43(3), pages 649-673, August.
    4. Bessembinder, Hendrik & Cooper, Michael J. & Zhang, Feng, 2023. "Mutual fund performance at long horizons," Journal of Financial Economics, Elsevier, vol. 147(1), pages 132-158.
    5. Semenov, Andrei, 2021. "Measuring the stock's factor beta and identifying risk factors under market inefficiency," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 635-649.
    6. Hollstein, Fabian & Prokopczuk, Marcel & Wese Simen, Chardin, 2017. "How to Estimate Beta?," Hannover Economic Papers (HEP) dp-617, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    7. Hollstein, Fabian & Prokopczuk, Marcel & Wese Simen, Chardin, 2019. "Estimating beta: Forecast adjustments and the impact of stock characteristics for a broad cross-section," Journal of Financial Markets, Elsevier, vol. 44(C), pages 91-118.
    8. Hossein Asgharian & Charlotte Christiansen & Ai Jun Hou & Weining Wang, 2017. "Long- and Short-Run Components of Factor Betas: Implications for Equity Pricing," CREATES Research Papers 2017-34, Department of Economics and Business Economics, Aarhus University.
    9. Ferson, Wayne & Mo, Haitao, 2016. "Performance measurement with selectivity, market and volatility timing," Journal of Financial Economics, Elsevier, vol. 121(1), pages 93-110.
    10. Cenesizoglu, Tolga & Reeves, Jonathan J., 2018. "CAPM, components of beta and the cross section of expected returns," Journal of Empirical Finance, Elsevier, vol. 49(C), pages 223-246.
    11. Isaenko, Sergey, 2023. "Trading strategies and the frequency of time-series," The Quarterly Review of Economics and Finance, Elsevier, vol. 90(C), pages 267-283.
    12. Chincarini, Ludwig B. & Kim, Daehwan & Moneta, Fabio, 2020. "Beta and firm age," Journal of Empirical Finance, Elsevier, vol. 58(C), pages 50-74.
    13. Gregory, Alan & Hua, Shan & Tharyan, Rajesh, 2018. "In search of beta," The British Accounting Review, Elsevier, vol. 50(4), pages 425-441.
    14. Joe Hirschberg & Jenny Lye, 2021. "Estimating risk premiums for regulated firms when accounting for reference-day variation and high-order moments of return volatility," Environment Systems and Decisions, Springer, vol. 41(3), pages 455-467, September.
    15. Fabian Hollstein & Marcel Prokopczuk & Chardin Wese Simen, 2020. "The Conditional Capital Asset Pricing Model Revisited: Evidence from High-Frequency Betas," Management Science, INFORMS, vol. 66(6), pages 2474-2494, June.
    16. Yasser Alhenawi & M. Kabir Hassan, 2023. "How do investors price accrual risk during crises?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(4), pages 4684-4706, October.
    17. Asgharian, Hossein & Christiansen, Charlotte & Hou, Ai Jun & Wang, Weining, 2021. "Long- and short-run components of factor betas: Implications for stock pricing," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
    18. Ryuta Sakemoto, 2022. "Multi‐scale inter‐temporal capital asset pricing model," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 4298-4317, October.
    19. Brennan, M.J. & Taylor, Alex P., 2023. "Expected returns and risk in the stock market," Journal of Empirical Finance, Elsevier, vol. 72(C), pages 276-300.
    20. Santi, Caterina & Zwinkels, Remco C.J., 2023. "Exploring style herding by mutual funds," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 85(C).
    21. Lai T. Hoang & Dirk G. Baur, 2021. "Spillovers and Asset Allocation," JRFM, MDPI, vol. 14(8), pages 1-31, July.
    22. Neuhierl, Andreas & Varneskov, Rasmus T., 2021. "Frequency dependent risk," Journal of Financial Economics, Elsevier, vol. 140(2), pages 644-675.
    23. Kang, Byoung Uk & In, Francis & Kim, Tong Suk, 2017. "Timescale betas and the cross section of equity returns: Framework, application, and implications for interpreting the Fama–French factors," Journal of Empirical Finance, Elsevier, vol. 42(C), pages 15-39.
    24. Marshall, Ben R. & Nguyen, Nhut H. & Visaltanachoti, Nuttawat, 2021. "Beta estimation in New Zealand," Pacific-Basin Finance Journal, Elsevier, vol. 70(C).

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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