Some Further Evidence on the Stochastic Properties of Systematic Risk

Although there is consensus in the finance literature that the beta risk of equity securities is stochastic, there is considerable disagreement as to whether the variation is purely random or exhibits autocorrelation through time. To investigate this issue, we employ a model that allows beta to exhibit both random and autoregressive behavior simultaneously. We test this model against alternative specifications on a large sample of individual securities and randomly formed portfolios comprising 10, 50, and 100 securities. Results are also presented for portfolios formed according to firm size.