Asynchronous Trading Revisited : Bias in Beta and Implications for Empirical Asset Pricing

Trading is not continuous, leading to asynchronous trading times for different assets. This paper analyses the effect of asynchronous trading on an asset’s beta and evaluates its implication for the asset pricing literature. It shows that estimates are heavily downward-biased, with estimated betas that can be up to 50% too small for an early data period. It further shows that the explanatory power of the conditional CAPM can be enhanced in the sense that it can fully explain the liquidity premium. I argue that the asset pricing literature does not fully account for the bias induced by asynchronous trading