Does Beta React to Market Conditions? Estimates of Bull and Bear Betas using a Nonlinear Market Model with an Endogenous Threshold Parameter
AbstractWe apply a logistic smooth transition market model (LSTM) to a sample of returns on Australian industry portfolios to investigate whether bull and bear market betas differ. Unlike other studies, our LSTM model allows for smooth transition between bull and bear states and allows the data to determine the threshold value. The estimated value of the smoothness parameter was very large for all industries implying that transition is abrupt. Therefore we estimated the threshold as a parameter along with the two betas in a dual beta market (DBM) framework using a sequential conditional least squares (SCLS) method. Using Lagrange Multiplier type tests of linearity, and the SCLS method our results indicate that for all but two industries the bull and bear betas are significantly different.
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Bibliographic InfoPaper provided by Monash University, Department of Econometrics and Business Statistics in its series Monash Econometrics and Business Statistics Working Papers with number 9/03.
Length: 29 pages
Date of creation: Apr 2003
Date of revision:
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Postal: PO Box 11E, Monash University, Victoria 3800, Australia
Web page: http://www.buseco.monash.edu.au/depts/ebs/
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Other versions of this item:
- George Woodward & Heather Anderson, 2009. "Does beta react to market conditions? Estimates of 'bull' and 'bear' betas using a nonlinear market model with an endogenous threshold parameter," Quantitative Finance, Taylor & Francis Journals, vol. 9(8), pages 913-924.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-05-29 (All new papers)
- NEP-CFN-2003-05-29 (Corporate Finance)
- NEP-ETS-2003-05-29 (Econometric Time Series)
- NEP-FIN-2003-05-29 (Finance)
- NEP-RMG-2003-05-29 (Risk Management)
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