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Modelling Asset Prices with Time-Varying Betas

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Author Info

  • Hall, Stephen G
  • Miles, David K
  • Taylor, Mark P

Abstract

This paper pursues the idea that the relevant distributional moments for the Capital Asset Pricing Model (CAPM) are the conditional, rather than the unconditional, covariances of returns. Thus, asset Betas may be time-varying and random rather than constant. The model is parameterized and estimated on monthly U.K. data by an application of the Autoregressive Conditional Heteroscedasticity (ARCH) formulation of Engle and its generalization (GARCH) due to Bollerslev. We also estimate a more general model which nests the consumption-based CAPM of Breeden. The results suggest that perceptions of risk, i.e. conditional variances and covariances, are time-varying but that memories are long and agents update their perceptions relatively slowly. Despite this, measured asset Betas show substantial short-term variation. Estimates of an extended CAPM, nesting both traditional and consumption-based variants, suggest that whilst significant time-variation in risk premia is still evident, no single measure of r Copyright 1989 by Blackwell Publishers Ltd and The Victoria University of Manchester

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Bibliographic Info

Article provided by University of Manchester in its journal The Manchester School of Economic & Social Studies.

Volume (Year): 57 (1989)
Issue (Month): 4 (December)
Pages: 340-56

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Handle: RePEc:bla:manch2:v:57:y:1989:i:4:p:340-56

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Cited by:
  1. Andrew Worthington & Helen Higgs, 2006. "Market Risk in Demutualized Self-Listed Stock Exchanges: An International Analysis of Selected Time-Varying Betas," Global Economic Review, Taylor & Francis Journals, vol. 35(3), pages 239-257.
  2. Choudhry, Taufiq, 2005. "Time-varying beta and the Asian financial crisis: Evidence from Malaysian and Taiwanese firms," Pacific-Basin Finance Journal, Elsevier, vol. 13(1), pages 93-118, January.
  3. J. Andrew Coutts & Terence Mills & Jennifer Roberts, 1997. "Time series and cross-section parameter stability in the market model: the implications for event studies," The European Journal of Finance, Taylor & Francis Journals, vol. 3(3), pages 243-259.
  4. Attiya Y. Javed, 2000. "Alternative Capital Asset Pricing Models: A Review of Theory and Evidence," PIDE-Working Papers 2000:179, Pakistan Institute of Development Economics.

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