Dynamic Realized Beta Models Using Robust Realized Integrated Beta Estimator

Abstract: This paper introduces a unified parametric modeling approach for time-varying market betas that can accommodate continuous-time diffusion and discrete-time series models based on a continuous-time series regression model to better capture the dynamic evolution of market betas. We call this the dynamic realized beta (DR Beta). We first develop a non-parametric realized integrated beta estimator using high-frequency financial data contaminated by microstructure noises, which is robust to the stylized features, such as the time-varying beta and the dependence structure of microstructure noises, and construct the estimator's asymptotic properties. Then, with the robust realized integrated beta estimator, we propose a quasi-likelihood procedure for estimating the model parameters based on the combined high-frequency data and low frequency dynamic structure. We also establish asymptotic theorems for the proposed estimator and conduct a simulation study to check the performance of finite samples of the estimator. The empirical study with the S&P 500 index and the top 50 large trading volume stocks from the S&P 500 illustrates that the proposed DR Beta model effectively accounts for dynamics in the market beta of individual stocks and better predicts future market betas.