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Does Beta React to Market Conditions? Estimates of Bull and Bear Betas using a Nonlinear Market Model with an Endogenous Threshold Parameter

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Author Info
George Woodward
Heather Anderson ()

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Abstract

We 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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File URL: http://www.buseco.monash.edu.au/depts/ebs/pubs/wpapers/2003/wp9-03.pdf
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Paper provided by Monash University, Department of Econometrics and Business Statistics in its series Monash Econometrics and Business Statistics Working Papers with number 9/03.

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Length: 29 pages
Date of creation: Apr 2003
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Handle: RePEc:msh:ebswps:2003-9

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Related research
Keywords: Logistic Smooth Transition Market Model (LSTM) Sequential Conditional Least Squares (SCLS) Linearity Tests Bull/Bear Betas

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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Cited by:
(explanations, 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.)

  1. Saumitra N. Bhaduri & S. Raja Sethu Durai, 2006. "Asymmetric beta in bull and bear market conditions: evidences from India," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 2(1), pages 55-59, January. [Downloadable!] (restricted)
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