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Nonparametric estimation betas in the Market Model

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Author Info
Mª Victoria Esteban González () (F. C.C. Económicas y Empresariales. UPV/EHU)
Susan Orbe Mandaluniz () (F. C.C. Económicas y Empresariales. UPV/EHU)
Abstract

In this study an alternative nonparametric estimator to the Fama and MacBeth approach for the CAPM estimation is proposed. Betas and risk premiums are estimated simultaneously in order to increase the explanatory power of the proxy for betas. A data driven method is proposed for selecting the smoothness degrees, which are directly related to the subsample sizes. Based on this relation, the traditional estimator is obtained as a particular case. Contrary to the results obtained in other studies our empirical evidence for Spanish market data is favorable to the CAPM.

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Paper provided by Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística) in its series BILTOKI with number 200603.

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Date of creation: 10 Nov 2006
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Handle: RePEc:ehu:biltok:200603

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Postal: Dpto. de Econometría y Estadística, Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain
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Related research
Keywords: smoothed rolling betas CAPM

Find related papers by JEL classification:
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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  3. Gonzalez-Rivera, Gloria, 1997. "The Pricing of Time-Varying Beta," Empirical Economics, Springer, vol. 22(3), pages 345-63.
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  6. Bos, T & Newbold, P, 1984. "An Empirical Investigation of the Possibility of Stochastic Systematic Risk in the Market Model," Journal of Business, University of Chicago Press, vol. 57(1), pages 35-41, January. [Downloadable!] (restricted)
  7. Cooley, Thomas F & Prescott, Edward C, 1976. "Estimation in the Presence of Stochastic Parameter Variation," Econometrica, Econometric Society, vol. 44(1), pages 167-84, January. [Downloadable!] (restricted)
  8. Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 385-415, April. [Downloadable!] (restricted)
  9. Shanken, Jay, 1992. "On the Estimation of Beta-Pricing Models," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 5(1), pages 1-33. [Downloadable!] (restricted)
  10. Lutkepohl, Helmut & Herwartz, Helmut, 1996. "Specification of varying coefficient time series models via generalized flexible least squares," Journal of Econometrics, Elsevier, vol. 70(1), pages 261-290, January. [Downloadable!] (restricted)
  11. Brooks, Robert D & Faff, Robert W & Josev, Thomas, 1997. "Beta Stability and Monthly Seasonal Effects: Evidence from the Australian Capital Market," Applied Economics Letters, Taylor and Francis Journals, vol. 4(9), pages 563-66, September. [Downloadable!] (restricted)
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