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The sensitivity of beta to the time horizon when log prices follow an Ornstein-Uhlenbeck process

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  • KiHoon Jimmy Hong
  • Steve Satchell

Abstract

This paper provides a new theoretical approach to investigate the sensitivity of the familiar beta of the capital asset pricing model to the length of the return measurement interval; a phenomenon known as the intervalling effect. By setting the problem in a continuous time setting, and using exact results, we are able to generalize existing results in the literature. We derive an expression for beta as a function of the time horizon h , conditional on current time t . We show that beta is monotonic in h and derive conditions for it to be increasing or decreasing.

Suggested Citation

  • KiHoon Jimmy Hong & Steve Satchell, 2014. "The sensitivity of beta to the time horizon when log prices follow an Ornstein-Uhlenbeck process," The European Journal of Finance, Taylor & Francis Journals, vol. 20(3), pages 264-290, March.
    • Handle: RePEc:taf:eurjfi:v:20:y:2014:i:3:p:264-290
    DOI: 10.1080/1351847X.2012.698992
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    Cited by:

    1. Fotis, Panagiotis & Pekka, Victoria & Polemis, Michael, 2015. "Intervalling-effect bias and evidences for competition policy," MPRA Paper 63211, University Library of Munich, Germany.
    2. Barbara Fidanza & Ottorino Morresi, 2015. "Does the Fama-Franch three-factor model work in the financial industry? Evidence from European bank stocks," Working Papers 47-2015, Macerata University, Department of Studies on Economic Development (DiSSE), revised May 2015.
    3. Pedro Antonio Martín-Cervantes & María del Carmen Valls Martínez, 2023. "Unraveling the relationship between betas and ESG scores through the Random Forests methodology," Risk Management, Palgrave Macmillan, vol. 25(3), pages 1-29, September.
    4. Brychykova, A., 2019. "Capital Asset Pricing Model Using Fuzzy Data and Application for the Russian Stock Market," Journal of the New Economic Association, New Economic Association, vol. 43(3), pages 58-77.

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