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Time-varying estimates of CAPM betas

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  • Groenewold, Nicolaas
  • Fraser, Patricia
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    Abstract

    It is well known that the CAPM beta is not stable over time. We investigate the nature of the time-variation in betas using monthly Australian data from 1979 to 1994 for 23 sectors. We discuss beta estimates for sub-periods and tests of the statistical adequacy of the market model used to estimate the betas. We estimate time-varying betas using recursive regressions, rolling regressions and using the Kalman Filter. We find considerable time-variation in the estimated betas and find that many are non-stationary. We estimate a simple model which explains the variation in each of the betas in terms of a time trend, allowing for a break both in level and in trend at October 1987. The model explains a large proportion of the variation in the betas over the sample period for most of the sectors.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0378475499000336
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    Bibliographic Info

    Article provided by Elsevier in its journal Mathematics and Computers in Simulation (MATCOM).

    Volume (Year): 48 (1999)
    Issue (Month): 4 ()
    Pages: 531-539

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    Handle: RePEc:eee:matcom:v:48:y:1999:i:4:p:531-539

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    Web page: http://www.journals.elsevier.com/mathematics-and-computers-in-simulation/

    Related research

    Keywords: Time-varying estimate; CAPM beta; Recursive beta;

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    Cited by:
    1. Joliet, Robert & Hubner, Georges, 2008. "Corporate international diversification and the cost of equity: European evidence," Journal of International Money and Finance, Elsevier, vol. 27(1), pages 102-123, February.
    2. Ortas, Eduardo & Moneva, José M. & Salvador, Manuel, 2012. "Does socially responsible investment equity indexes in emerging markets pay off? Evidence from Brazil," Emerging Markets Review, Elsevier, vol. 13(4), pages 581-597.
    3. Ramaprasad Bhar, 2010. "Stochastic Filtering With Applications In Finance:," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 7736.
    4. Mattia Ciprian & Stefano d'Addona, 2005. "Time Varying Sensitivities on a GRID architecture," Finance 0511007, EconWPA.
    5. Bhar, Ramaprasad & Hamori, Shigeyuki, 2007. "Co-movement in the price of risk of aggregate equity markets," Economic Systems, Elsevier, vol. 31(3), pages 256-271, September.
    6. Caporale, Tony, 2012. "Time varying CAPM betas and banking sector risk," Economics Letters, Elsevier, vol. 115(2), pages 293-295.
    7. Mariangela Bonasia & Oreste Napolitano, 2007. "Do Fundamentals and Credibility Matter in a Funded Pension System ?A Markov Switching Analysis for Australia and Iceland," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 50(2), pages 221-248.
    8. Yoshihiko Tsukuda & Tatsuyoshi Miyakoshi & Junji Shimada, 2005. "Dynamic Efficiency in the East European Emerging Markets," Asia-Pacific Financial Markets, Springer, vol. 12(2), pages 159-179, June.
    9. Tomas Adam & Sona Benecka & Ivo Jansky, 2012. "Time-Varying Betas of Banking Sectors," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 62(6), pages 485-504, December.
    10. Sascha Mergner & Jan Bulla, 2008. "Time-varying beta risk of Pan-European industry portfolios: A comparison of alternative modeling techniques," The European Journal of Finance, Taylor & Francis Journals, vol. 14(8), pages 771-802.
    11. Coleman, Jane A. & Shaik, Saleem, 2009. "Time-Varying Estimation of Crop Insurance Program in Altering North Dakota Farm Economic Structure," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49516, Agricultural and Applied Economics Association.
    12. Buckland, Roger & Fraser, Patricia, 2002. "The scale and patterns of abnormal returns to equity investment in UK electricity distribution," Global Finance Journal, Elsevier, vol. 13(1), pages 39-62.

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