A Framework for Exploring the Macroeconomic Determinants of Systematic Risk

Abstract

The increasing availability of high-frequency asset return data has had a fundamental impact on empirical financial economics, focusing attention on asset return volatility and correlation dynamics, with key applications in portfolio and risk management. So-called "realized" volatilities and correlations have featured prominently in the recent literature, and numerous studies have provided direct characterizations of the unconditional and conditional distributions of realized volatilities and correlations across different assets, asset classes, countries, and sample periods. For overviews see Andersen et al. (2005a, b). In this paper we selectively survey, unify and extend that literature. Rather than focusing exclusively on characterization of 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.