Beta Risk in the Cross-section of Stocks and Options

In order to study beta risk, we develop a multivariate stochastic volatility model in which individual equity and market returns co-vary stochastically. In the model, the stochastic covariance matrix of an individual equity return with the market follows a bivariate Wishart process and the associated beta risk is priced. We estimate the model on returns and options jointly for a large cross-section of stocks. When analyzing the modelís empirical performance, we Önd that it outperforms the standard rolling regression approach that is prevalent in empirical asset pricing.