Quantile relationships between standard, diffusion and jump betas across Japanese banks

Chowdhury, B and Jeyasreedharan, N and Dungey, M (2017) Quantile relationships between standard, diffusion and jump betas across Japanese banks. Discussion Paper. University of Tasmania.

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Abstract

Using high frequency financial data and associated risk decomposition and quantile
regression techniques we characterise some stylised facts and relationship(s) between standard
betas, diffusion betas and jump betas of individual stocks and portfolios in Japanese market.
We then investigate whether the beta in the conventional CAPM is the weighted average of the
jump beta and diffusion beta in the jump-diffusion model and how these different betas behave
across different banks. Our empirical findings indicate that jump betas are cross-sectionally
more dispersed than diffusion and standard betas. We find that the relationship(s) between the
three betas are non-linear. We also find that standard betas are influenced more by diffusion
betas than the jump betas, although the actual magnitude of the weights differ significantly
across the quantile. This relationship holds for both individual stocks and portfolios. Empirical
studies have shown that betas vary systematically across large and small firm equities. For
large equity portfolios, the jump beta-diffusion beta ratios are lower that the jump beta diffusion
beta ratios of the small equity portfolios. Empirically, we further find that the standard
CAPM beta is composed of two-components, i.e. it is the weighted average of the diffusion
component and the jump component.

Item Type: Report (Discussion Paper) University of Tasmania Discussion Paper Series N 2017-10 17 Jul 2017 01:33 17 Jul 2017 01:33 View statistics for this item