This paper provides a new theoretical approach to investigate the sensitivity of the familiar beta of the capital asset pricing model (CAPM) to the length of the return measurement interval; a phenomenon known as the Intervalling effect. By setting the problem in a continuous time setting, and using exact results, we are able to generalize existing results in the literature. We derive an __EXPRESSION__ for beta as a function of the time horizon h, conditional on current time t. We show that beta is monotonic in h and derive conditions for it to be increasing or decreasing.
Keywords: Finance, Intervalling-Effect in Beta, Autocorrelation in Returns, Bivariate Ornstein – Uhlenbeck Process
