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Testing for Time-variation in Beta in India

Author

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  • Syed Abuzar Moonis
  • Ajay Shah

    (Department of Economic Affairs, North Block, New Delhi 110 001 E-mail: ajayshah@mayin.org)

Abstract

The beta of a stock is important in a variety of contexts, ranging from the cost of capital, asset-pricing theory, to hedging using index derivatives. It is common to measure betas by estimating the market model using straight ordinary least square (OLS) regression in obtaining beta estimates. This assumes that betas are constant, despite strong economic arguments in favour of time-varying betas. In this article, we test for time-varying betas in the context of a market model with Generalised Auto Regressive Conditional Heteroscedasticity (GARCH) errors, using the modified Kalman filter of Harvey et al. (1992). The null of beta constancy is rejected for 52 per cent of stocks. This has significant implications for portfolio diversification and hedging.

Suggested Citation

  • Syed Abuzar Moonis & Ajay Shah, 2003. "Testing for Time-variation in Beta in India," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 2(2), pages 163-180, May.
    • Handle: RePEc:sae:emffin:v:2:y:2003:i:2:p:163-180
    DOI: 10.1177/097265270300200202
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    References listed on IDEAS

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    3. Aasif Shah & Arif Tali & Qaiser Farooq, 2018. "Beta through the prism of wavelets," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 4(1), pages 1-17, December.
    4. Асатуров К.Г., 2015. "Динамические Модели Систематического Риска: Сравнение На Примере Индийского Фондового Рынка," Журнал Экономика и математические методы (ЭММ), Центральный Экономико-Математический Институт (ЦЭМИ), vol. 51(4), pages 59-75, октябрь.
    5. 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.
    6. Jianhua Zhang & Clas Wihlborg, 2010. "CAPM in Up and Down Markets," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 9(2), pages 229-255, August.
    7. Onour, Ibrahim, 2008. "Forward-Looking Beta Estimates:Evidence from an Emerging Market," MPRA Paper 14992, University Library of Munich, Germany.
    8. Mehmet Balcilar & Riza Demirer & Festus V. Bekun, 2021. "Flexible Time-Varying Betas in a Novel Mixture Innovation Factor Model with Latent Threshold," Mathematics, MDPI, vol. 9(8), pages 1-20, April.
    9. 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.
    10. Dr. Ibrahim Onour, "undated". "The Global Financial Crisis and Equity Markets in Middle East Oil Exporting Countries," API-Working Paper Series 1009, Arab Planning Institute - Kuwait, Information Center.
    11. Ibrahim Onour, "undated". "Exploring Stability of Systematic Risk: Sectoral Portfolio Analysis," API-Working Paper Series 1002, Arab Planning Institute - Kuwait, Information Center.
    12. Nieto Domenech, Belén & Orbe Mandaluniz, Susan & Zárraga Alonso, Ainhoa, 2011. "Time-Varying Beta Estimators in the Mexican Emerging Market," BILTOKI 1134-8984, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística).
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