Economics Seminar: Conditional Alphas and Realized Betas

Valentina Corradi

When?

Thursday 6 December 2012, 16:00 to 17:30

Where?

40AD00

Open to:

Alumni, Public, Staff, Students

Speaker:

Prof. Valentina Corradi

Prof. Valentina Corradi (University of Warwick)

"Conditional Alphas and Realized Betas" (with W. Distaso and M. Fernandes)

Abstract

This paper proposes a two-step procedure to back out the conditional alpha for a given stock from high-frequency returns. We first estimate the realized factor loadings of the stock, and then retrieve the conditional alpha by estimating the conditional expectation of the stock return in excess over the realized risk premia. The estimation method is fully nonparametric in stark contrast with the existing literature on conditional alphas and betas. We provide conditions for uniform convergence of the estimated alphas. We then employ NYSE data to determine the main drivers of the conditional alphas and to track mispricing over time. In addition, we assess the economic relevance of our conditional alpha estimates by means of a market-neutral trading strategy that longs stocks with positive alpha and shorts stocks with negative alphas. Both the cross section and the time series momentum strategies give high average returns and sharp-ratios above one.