Advanced Search
MyIDEAS: Login to save this article or follow this journal

Time-varying beta: a boundedly rational equilibrium approach

Contents:

Author Info

  • Carl Chiarella
  • Roberto Dieci
  • Xue-Zhong He

    ()

Abstract

The conditional CAPM with time-varying betas has been widely used to explain the cross-section of asset returns. However, most of the literature on time-varying beta is motivated by econometric estimation using various latent risk factors rather than explicit modelling of the stochastic behaviour of betas through agents’ behaviour, such as momentum trading. Misspecification of beta risk and the lack of any theoretical guidance on how to specify risk factors based on the representative agent economy appear empirically challenging. In this paper, we set up a dynamic equilibrium model of a financial market with boundedly rational and heterogeneous agents within the mean-variance framework of repeated one-period optimisation and develop an explicit dynamic behaviour CAPM relation between the expected equilibrium returns and time-varying betas. By incorporating the two most commonly used types of investors, fundamentalists and chartists, into the model, we show that there is a systematic change in the market portfolio, risk-return relationships, and time varying betas when investors change their behaviour, such as the chartists acting as momentum traders. In particular, we demonstrate the stochastic nature of time-varying betas. We also show that the commonly used rolling window estimates of time-varying betas may not be consistent with the ex-ante betas implied by the equilibrium model. The results provide a number of insights into an understanding of time-varying beta. Copyright Springer-Verlag 2013

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://hdl.handle.net/10.1007/s00191-011-0233-5
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Springer in its journal Journal of Evolutionary Economics.

Volume (Year): 23 (2013)
Issue (Month): 3 (July)
Pages: 609-639

as in new window
Handle: RePEc:spr:joevec:v:23:y:2013:i:3:p:609-639

Contact details of provider:
Web page: http://link.springer.de/link/service/journals/00191/index.htm

Order Information:
Web: http://link.springer.de/orders.htm

Related research

Keywords: Equilibrium asset prices; CAPM; Time-varying betas; Heterogeneous expectations; Fundamentalism; Momentum traders; G12; D84;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Carl Chiarella & Roberto Dieci & Xue-Zhong He, 2009. "A Framework for CAPM with Heterogenous Beliefs," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 254, Quantitative Finance Research Centre, University of Technology, Sydney.
  2. Harvey, Campbell R., 2001. "The specification of conditional expectations," Journal of Empirical Finance, Elsevier, Elsevier, vol. 8(5), pages 573-637, December.
  3. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 22(8-9), pages 1235-1274, August.
  4. Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
  5. Carl Chiarella & Tony He & Cars H. Hommes, 2005. "A Dynamic Analysis of Moving Average Rules," Tinbergen Institute Discussion Papers 05-057/1, Tinbergen Institute.
  6. Bohm, Volker & Wenzelburger, Jan, 2005. "On the performance of efficient portfolios," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 29(4), pages 721-740, April.
  7. Chiarella, Carl & He, Xue-Zhong & Zheng, Min, 2011. "An analysis of the effect of noise in a heterogeneous agent financial market model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 35(1), pages 148-162, January.
  8. Westerhoff, Frank H. & Dieci, Roberto, 2006. "The effectiveness of Keynes-Tobin transaction taxes when heterogeneous agents can trade in different markets: A behavioral finance approach," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 30(2), pages 293-322, February.
  9. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, Econometric Society, vol. 65(5), pages 1059-1096, September.
  10. Mikhail Anufriev & Pietro Dindo, 2007. "Wealth-driven Selection in a Financial Market with Heterogeneous Agents," LEM Papers Series 2007/27, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  11. Gaunersdorfer, A. & Hommes, C.H., 2000. "A Nonlinear Structural Model for Volatility Clustering," CeNDEF Working Papers 00-02, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  12. Jagannathan, Ravi & Wang, Zhenyu, 1996. " The Conditional CAPM and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 51(1), pages 3-53, March.
  13. Carl Chiarella & Roberto Dieci & Xue-Zhong He, 2011. "Do heterogeneous beliefs diversify market risk?," The European Journal of Finance, Taylor & Francis Journals, vol. 17(3), pages 241-258.
  14. Lewellen, Jonathan & Nagel, Stefan, 2006. "The conditional CAPM does not explain asset-pricing anomalies," Journal of Financial Economics, Elsevier, Elsevier, vol. 82(2), pages 289-314, November.
  15. Kothari, S P & Shanken, Jay & Sloan, Richard G, 1995. " Another Look at the Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 50(1), pages 185-224, March.
  16. Leigh Tesfatsion, 2002. "Agent-Based Computational Economics," Computational Economics, EconWPA 0203001, EconWPA, revised 15 Aug 2002.
  17. Chiarella, Carl & He, Xue-Zhong, 2003. "Dynamics of beliefs and learning under aL-processes -- the heterogeneous case," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 27(3), pages 503-531, January.
  18. Day, Richard H. & Huang, Weihong, 1990. "Bulls, bears and market sheep," Journal of Economic Behavior & Organization, Elsevier, vol. 14(3), pages 299-329, December.
  19. Zapatero, Fernando, 1998. "Effects of financial innovations on market volatility when beliefs are heterogeneous," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 22(4), pages 597-626, April.
  20. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 987-1007, July.
  21. John Y. Campbell & Tuomo Vuolteenaho, 2003. "Bad Beta, Good Beta," NBER Working Papers 9509, National Bureau of Economic Research, Inc.
  22. Schwert, G William, 1989. " Why Does Stock Market Volatility Change over Time?," Journal of Finance, American Finance Association, American Finance Association, vol. 44(5), pages 1115-53, December.
  23. Wayne E. Ferson & Campbell R. Harvey, 1999. "Conditioning Variables and the Cross-Section of Stock Returns," NBER Working Papers 7009, National Bureau of Economic Research, Inc.
  24. Eric Ghysels, 1998. "On Stable Factor Structures in the Pricing of Risk: Do Time-Varying Betas Help or Hurt?," Journal of Finance, American Finance Association, American Finance Association, vol. 53(2), pages 549-573, 04.
  25. Giulio Bottazzi & Pietro Dindo, 2010. "Evolution and market behavior with endogenous investment rules," LEM Papers Series 2010/20, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  26. Volker Bohm & Carl Chiarella, 2000. "Mean Variance Preferences, Expectations Formation, and the Dynamics of Random Asset Prices," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 46, Quantitative Finance Research Centre, University of Technology, Sydney.
  27. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, Elsevier, vol. 45(1-2), pages 39-70.
  28. Collins, Daniel W & Ledolter, Johannes & Rayburn, Judy Dawson, 1987. "Some Further Evidence on the Stochastic Properties of Systematic Risk," The Journal of Business, University of Chicago Press, vol. 60(3), pages 425-48, July.
  29. Braun, Phillip A & Nelson, Daniel B & Sunier, Alain M, 1995. " Good News, Bad News, Volatility, and Betas," Journal of Finance, American Finance Association, American Finance Association, vol. 50(5), pages 1575-1603, December.
  30. C. Chiarella & X-Z. He, 2001. "Asset price and wealth dynamics under heterogeneous expectations," Quantitative Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 1(5), pages 509-526.
  31. Franzoni, Francesco & Adrian, Tobias, 2005. "Learning about Beta: time-varying factor loadings, expected returns and the conditional CAPM," Les Cahiers de Recherche 828, HEC Paris.
  32. Ang, Andrew & Chen, Joseph, 2007. "CAPM over the long run: 1926-2001," Journal of Empirical Finance, Elsevier, Elsevier, vol. 14(1), pages 1-40, January.
  33. Wenzelburger, Jan, 2004. "Learning to predict rationally when beliefs are heterogeneous," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(10), pages 2075-2104, September.
  34. J. Doyne Farmer & Laszlo Gillemot & Fabrizio Lillo & Szabolcs Mike & Anindya Sen, 2003. "What really causes large price changes?," Papers cond-mat/0312703, arXiv.org, revised Apr 2004.
  35. Lintner, John, 1969. "The Aggregation of Investor's Diverse Judgments and Preferences in Purely Competitive Security Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 4(04), pages 347-400, December.
  36. Carl Chiarella & Roberto Dieci & Laura Gardini, 2005. "The Dynamic Interaction of Speculation and Diversification," Applied Mathematical Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 12(1), pages 17-52.
  37. Narasimhan Jegadeesh, 2001. "Profitability of Momentum Strategies: An Evaluation of Alternative Explanations," Journal of Finance, American Finance Association, American Finance Association, vol. 56(2), pages 699-720, 04.
  38. Dybvig, Philip H & Ross, Stephen A, 1985. " Differential Information and Performance Measurement Using a Security Market Line," Journal of Finance, American Finance Association, American Finance Association, vol. 40(2), pages 383-99, June.
  39. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 357-84, March.
  40. Cars H. Hommes, 2005. "Heterogeneous Agent Models in Economics and Finance," Tinbergen Institute Discussion Papers 05-056/1, Tinbergen Institute.
  41. Xue-Zhong He & Carl Chiarella, 1999. "Heterogeneous Beliefs, Risk and Learning in a Simple Asset-Pricing Model," Computing in Economics and Finance 1999 223, Society for Computational Economics.
  42. Frank Westerhoff, 2003. "Multi-Asset Market Dynamics," Computing in Economics and Finance 2003 88, Society for Computational Economics.
  43. Fabozzi, Frank J. & Francis, Jack Clark, 1978. "Beta as a Random Coefficient," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(01), pages 101-116, March.
  44. Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(2), pages 385-415, April.
  45. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  46. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
  47. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  48. Carl Chiarella & Roberto Dieci & Xue-Zhong He, 2005. "Heterogeneous Expectations and Speculative Behaviour in a Dynamic Multi-Asset Framework," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 166, Quantitative Finance Research Centre, University of Technology, Sydney.
  49. Ulrich Horst & Jan Wenzelburger, 2008. "On non-ergodic asset prices," Economic Theory, Springer, vol. 34(2), pages 207-234, February.
  50. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, American Finance Association, vol. 48(1), pages 65-91, March.
  51. Carl Chiarella & Roberto Dieci & Xue-Zhong He, 2008. "Heterogeneity, Market Mechanisms, and Asset Price Dynamics," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 231, Quantitative Finance Research Centre, University of Technology, Sydney.
  52. Anufriev, Mikhail & Bottazzi, Giulio & Pancotto, Francesca, 2006. "Equilibria, stability and asymptotic dominance in a speculative market with heterogeneous traders," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 30(9-10), pages 1787-1835.
  53. Rubinstein, Mark, 1974. "An aggregation theorem for securities markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 1(3), pages 225-244, September.
  54. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(1), pages 116-31, February.
  55. Bos, T & Newbold, P, 1984. "An Empirical Investigation of the Possibility of Stochastic Systematic Risk in the Market Model," The Journal of Business, University of Chicago Press, vol. 57(1), pages 35-41, January.
  56. Andrew B. Abel, 2001. "An exploration of the effects of pessimism and doubt on asset returns," Working Papers 01-1, Federal Reserve Bank of Philadelphia.
  57. Williams, Joseph T., 1977. "Capital asset prices with heterogeneous beliefs," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 219-239, November.
  58. James J. Heckman, 2001. "Micro Data, Heterogeneity, and the Evaluation of Public Policy: Nobel Lecture," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 109(4), pages 673-748, August.
  59. Simone Alfarano & Thomas Lux & Friedrich Wagner, 2005. "Estimation of Agent-Based Models: The Case of an Asymmetric Herding Model," Computational Economics, Society for Computational Economics, vol. 26(1), pages 19-49, August.
  60. He, Xue-Zhong & Li, Youwei, 2007. "Power-law behaviour, heterogeneity, and trend chasing," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(10), pages 3396-3426, October.
  61. Eugene F. Fama & Kenneth R. French, 2006. "The Value Premium and the CAPM," Journal of Finance, American Finance Association, American Finance Association, vol. 61(5), pages 2163-2185, October.
  62. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, Elsevier, vol. 33(1), pages 3-56, February.
  63. Tarun Chordia & Lakshmanan Shivakumar, 2002. "Momentum, Business Cycle, and Time-varying Expected Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 57(2), pages 985-1019, 04.
  64. Detemple Jerome & Murthy Shashidhar, 1994. "Intertemporal Asset Pricing with Heterogeneous Beliefs," Journal of Economic Theory, Elsevier, vol. 62(2), pages 294-320, April.
  65. Basak, Suleyman, 2005. "Asset pricing with heterogeneous beliefs," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2849-2881, November.
  66. Christopher A. Hennessy & Toni M. Whited, 2007. "How Costly Is External Financing? Evidence from a Structural Estimation," Journal of Finance, American Finance Association, American Finance Association, vol. 62(4), pages 1705-1745, 08.
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 in new window

Cited by:
  1. Carl Chiarella & Roberto Dieci & Xue-Zhong He & Kai Li, 2012. "An Evolutionary CAPM Under Heterogeneous Beliefs," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 315, Quantitative Finance Research Centre, University of Technology, Sydney.
  2. Giulio Bottazzi & Pietro Dindo, 2013. "Evolution and market behavior in economics and finance: introduction to the special issue," Journal of Evolutionary Economics, Springer, Springer, vol. 23(3), pages 507-512, July.
  3. Anufriev, Mikhail & Bottazzi, Giulio & Marsili, Matteo & Pin, Paolo, 2012. "Excess covariance and dynamic instability in a multi-asset model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 36(8), pages 1142-1161.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:spr:joevec:v:23:y:2013:i:3:p:609-639. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn) or (Christopher F Baum).

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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