IDEAS home Printed from https://ideas.repec.org/a/bla/jfnres/v6y1983i4p275-288.html
   My bibliography  Save this article

The Market Model As An Appropriate Description Of The Stochastic Process Generating Security Returns

Author

Listed:
  • Roger P. Bey

Abstract

The objective of this research was to investigate whether the market model is an appropriate description of the stochastic process generating security returns. In contrast to previous studies which concentrated only on the stationarity of β, the emphasis in this research was to study the stationarity of the entire market model. Four statistical tests, cusum, cusum of squares, moving regression, and time-trending regression, were used. The data base consisted of 200 securities and four time periods. The cusum of squares generally identified the largest number of nonstationary securities. However, the amount and composition of the nonstationary sets varied considerably both by statistical test and time period. The lack of consistency in the stationarity of the market model limits the predictability of stationarity and, hence, hinders the application of the market model. Serious questions are raised as to whether the market model is an appropriate description of the stochastic process generating security returns.

Suggested Citation

  • Roger P. Bey, 1983. "The Market Model As An Appropriate Description Of The Stochastic Process Generating Security Returns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 6(4), pages 275-288, December.
    • Handle: RePEc:bla:jfnres:v:6:y:1983:i:4:p:275-288
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1111/j.1475-6803.1983.tb00338.x
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Garbade, Kenneth & Rentzler, Joel, 1981. "Testing the Hypothesis of Beta Stationarity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(3), pages 577-587, October.
    2. William F. Sharpe, 1963. "A Simplified Model for Portfolio Analysis," Management Science, INFORMS, vol. 9(2), pages 277-293, January.
    3. Kon, Stanley J & Jen, Frank C, 1978. "Estimation of Time-Varying Systematic Risk and Performance for Mutual Fund Portfolios: An Application of Switching Regression," Journal of Finance, American Finance Association, vol. 33(2), pages 457-475, May.
    4. Miller, Tom W. & Gressis, Nicholas, 1980. "Nonstationarity and Evaluation of Mutual Fund Performance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(3), pages 639-654, September.
    5. Kon, Stanley J & Lau, W Patrick, 1979. "Specification Tests for Portfolio Regression Parameter Stationarity and the Implications for Empirical Research," Journal of Finance, American Finance Association, vol. 34(2), pages 451-465, May.
    6. Jensen, Michael C, 1969. "Risk, The Pricing of Capital Assets, and the Evaluation of Investment Portfolios," The Journal of Business, University of Chicago Press, vol. 42(2), pages 167-247, April.
    7. Michael C. Jensen, 1972. "Capital Markets: Theory and Evidence," Bell Journal of Economics, The RAND Corporation, vol. 3(2), pages 357-398, Autumn.
    8. Blume, Marshall E, 1975. "Betas and Their Regression Tendencies," Journal of Finance, American Finance Association, vol. 30(3), pages 785-795, June.
    9. Klemkosky, Robert C & Maness, Terry S, 1978. "The Predictability of Real Portfolio Risk Levels," Journal of Finance, American Finance Association, vol. 33(2), pages 631-639, May.
    10. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    11. Fabozzi, Frank J. & Francis, Jack Clark, 1978. "Beta as a Random Coefficient," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(1), pages 101-116, March.
    12. Bey, Roger P. & Pinches, George E., 1980. "Additional Evidence of Heteroscedasticity in the Market Model," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(2), pages 299-322, June.
    13. Fabozzi, Frank J & Francis, Jack Clark, 1977. "Stability Tests for Alphas and Betas over Bull and Bear Market Conditions," Journal of Finance, American Finance Association, vol. 32(4), pages 1093-1099, September.
    14. Sunder, Shyam, 1980. "Stationarity of Market Risk: Random Coefficients Tests for Individual Stocks," Journal of Finance, American Finance Association, vol. 35(4), pages 883-896, September.
    15. Alexander, Gordon J. & Chervany, Norman L., 1980. "On the Estimation and Stability of Beta," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(1), pages 123-137, March.
    16. Fama, Eugene F, et al, 1969. "The Adjustment of Stock Prices to New Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(1), pages 1-21, February.
    17. Porter, R. Burr & Ezzell, John R., 1975. "A note on the predictive ability of beta coefficients," Journal of Business Research, Elsevier, vol. 3(4), pages 365-372, October.
    18. Blume, Marshall E, 1971. "On the Assessment of Risk," Journal of Finance, American Finance Association, vol. 26(1), pages 1-10, March.
    19. Jensen, Michael C & Bennington, George A, 1970. "Random Walks and Technical Theories: Some Additional Evidence," Journal of Finance, American Finance Association, vol. 25(2), pages 469-482, May.
    20. Harry V. Roberts, 1959. "Stock‐Market “Patterns” And Financial Analysis: Methodological Suggestions," Journal of Finance, American Finance Association, vol. 14(1), pages 1-10, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bill McDonald & William D. Nichols, 1984. "Nonstationarity Of Beta And Tests Of Market Efficiency," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 7(4), pages 315-322, December.
    2. Burnett, John E. & Carroll, Carolyn & Thistle, Paul, 1995. "Implications of multiple structural changes in event studies," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(4), pages 467-480.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Burnett, John E. & Carroll, Carolyn & Thistle, Paul, 1995. "Implications of multiple structural changes in event studies," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(4), pages 467-480.
    2. Fernando Rubio, 2005. "Eficiencia De Mercado, Administracion De Carteras De Fondos Y Behavioural Finance," Finance 0503028, University Library of Munich, Germany, revised 23 Jul 2005.
    3. Rua, António & Nunes, Luis C., 2012. "A wavelet-based assessment of market risk: The emerging markets case," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(1), pages 84-92.
    4. Magdalena Mikolajek-Gocejna, 2021. "Estimation, Instability, and Non-Stationarity of Beta Coefficients for Twenty-four Emerging Markets in 2005-2021," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 370-395.
    5. Manuel Monge & Luis A. Gil-Alana, 2020. "The Lithium Industry and Analysis of the Beta Term Structure of Oil Companies," Risks, MDPI, vol. 8(4), pages 1-17, December.
    6. Anders Johansson, 2009. "An analysis of dynamic risk in the Greater China equity markets," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 7(3), pages 299-320.
    7. Dana J. Johnson & Richard E. Bennett & Richard J. Curcio, 1979. "A Note On The Deceptive Nature Of Bayesian Forecasted Betas," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 2(1), pages 65-69, March.
    8. Anjum, Sohail & Qayyum, Unbreen & Qureshi, Madeeha Gohar, 2019. "Aggregate performance evaluation of US Equity Mutual Funds - Explaining the performance of Growth Funds vs. Value Funds," MPRA Paper 100043, University Library of Munich, Germany.
    9. Szczepocki Piotr, 2019. "Clustering Companies Listed on the Warsaw Stock Exchange According to Time-Varying Beta," Econometrics. Advances in Applied Data Analysis, Sciendo, vol. 23(2), pages 63-79, June.
    10. Ortas, E. & Salvador, M. & Moneva, J.M., 2015. "Improved beta modeling and forecasting: An unobserved component approach with conditional heteroscedastic disturbances," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 27-51.
    11. Phoebe Koundouri & Nikolaos Kourogenis & Nikitas Pittis & Panagiotis Samartzis, 2015. "Factor Models as 'Explanatory Unifiers' versus 'Explanatory Ideals' of Empirical Regularities of Stock Returns," DEOS Working Papers 1507, Athens University of Economics and Business.
    12. Abdul Rahman & Lawrence Kryzanowski & Ah Boon Sim, 1987. "Systematic Risk In A Purely Random Market Model: Some Empirical Evidence For Individual Public Utilities," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 10(2), pages 143-152, June.
    13. Antypas, Antonios & Caporale, Guglielmo Maria & Kourogenis, Nikolaos & Pittis, Nikitas, 2020. "Estimation of conditional asset pricing models with integrated variables in the beta specification," Research in International Business and Finance, Elsevier, vol. 52(C).
    14. K. Giannopoulos, 1995. "Estimating the time Varying Components of international stock markets' risk," The European Journal of Finance, Taylor & Francis Journals, vol. 1(2), pages 129-164.
    15. Esteban González, María Victoria & Tusell Palmer, Fernando Jorge, 2009. "Predicting Betas: Two new methods," BILTOKI 1134-8984, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística).
    16. Romacho, Joao Carlos & Cortez, Maria Ceu, 2006. "Timing and selectivity in Portuguese mutual fund performance," Research in International Business and Finance, Elsevier, vol. 20(3), pages 348-368, September.
    17. N. Groenewold & P. Fraser, 1999. "Forecasting Beta: How well does the 'five year rule of thumb' do?," Economics Discussion / Working Papers 99-01, The University of Western Australia, Department of Economics.
    18. J. David Spiceland & Jerry E. Trapnell, 1983. "The Effect Of Market Conditions And Risk Classifications On Market Model Parameters," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 6(3), pages 217-222, September.
    19. Frankfurter, George M. & Phillips, Herbert E., 1996. "Normative implications of equilibrium models: Homogeneous expectations and other artificialities," Journal of Economic Behavior & Organization, Elsevier, vol. 31(1), pages 67-83, October.
    20. Mihir Dash & Silky Sonthalia Sundarka, 2015. "Testing the Stationarity of Beta for Automotive and Auto-Ancillary Sector Stocks in Indian Stock Market," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 4(2), pages 76-81.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jfnres:v:6:y:1983:i:4:p:275-288. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/sfaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.