Paper # Author Title
We selectively survey, unify and extend the literature on realized volatility of financial asset returns. Rather than focusing exclusively on characterizing the properties of realized volatility, we progress by examining economically interesting functions of realized volatility, namely realized betas for equity portfolios, relating them both to their underlying realized variance and covariance parts and to underlying macroeconomic fundamentals. Download Paper
A large literature over several decades reveals both extensive concern with the question of time-varying betas and an emerging consensus that betas are in fact time-varying, leading to the prominence of the conditional CAPM. Set against that background, we assess the dynamics in realized betas, vis-à-vis the dynamics in the underlying realized market variance and individual equity covariances with the market. Working in the recently-popularized framework of realized volatility, we are led to a framework of nonlinear fractional cointegration: although realized variances and covariances are very highly persistent and well approximated as fractionally-integrated, realized betas, which are simple nonlinear functions of those realized variances and covariances, are less persistent and arguably best modeled as stationary I(0) processes. We conclude by drawing implications for asset pricing and portfolio management. Download Paper