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Preliminary Work on the Effect of a Flagged Market Jump on an Equity’s Beta

Preliminary Work on the Effect of a Flagged Market Jump on an Equity’s Beta. Junior Research Seminar Economics 201FS. Outline. Review Beta Estimate Time Horizon Leads/Lags Shifting Objective/Timeline. Capital Asset Pricing Model. Return of Equity = Risk-free rate

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Preliminary Work on the Effect of a Flagged Market Jump on an Equity’s Beta

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  1. Preliminary Work on the Effect of a Flagged Market Jump on an Equity’s Beta Junior Research Seminar Economics 201FS

  2. Outline • Review • Beta Estimate • Time Horizon • Leads/Lags • Shifting • Objective/Timeline

  3. Capital Asset Pricing Model Return of Equity = Risk-free rate + (Beta * Market Premium) Beta = Cov(Market Return, Equity Return) / Var(Market Return) Assumptions: • Market return and residual are uncorrelated • Residuals are mutually uncorrelated • Residuals are difference between actual return and predicted return

  4. Beta Estimates • In order to smooth out estimate: • Time Horizon for Beta = One Month • In order to increase the estimate of Beta: • Method used from Scholes and Williams (1977)

  5. Average Beta: 0.4372

  6. Average Beta Over Time Interval: .4017

  7. Objective • Introduce a dummy variable (Jmt), that depends on if the market (SPY) jumped • Lee/Mykland • rcmt = (1-Jmt)(rmt) • rjmt = (Jmt)(rmt) rit = αi + βic (1-Jmt)(rmt) + βij (Jmt)(rmt) + εit

  8. Timeline • March 28: • Monthly Beta • April 11: • Leads/Lags • Lee/Mykland • Shifting Beta • April 25: Presentation of Results • May 2: Final Report Due

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