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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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  • 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/ebs/pubs/wpapers/2003/wp9-03.pdf
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Bibliographic Info

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
Date of revision:
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;

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  1. Neftci, Salih N, 1984. "Are Economic Time Series Asymmetric over the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 307-28, April.
  2. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
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Cited by:
  1. Janusz BrzeszczyƄski & Graham McIntosh, 2014. "Performance of Portfolios Composed of British SRI Stocks," Journal of Business Ethics, Springer, vol. 120(3), pages 335-362, March.
  2. Janusz Brzeszczynski & Graham McIntosh, 2012. "Performance of Portfolios Composed of British SRI Stocks," CFI Discussion Papers 1204, Centre for Finance and Investment, Heriot Watt University.
  3. Dumitriu, Ramona & Stefanescu, Razvan & Nistor, Costel, 2010. "Systematic risks for the financial and for the non-financial Romanian companies," MPRA Paper 41636, University Library of Munich, Germany, revised 28 Feb 2010.
  4. 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.

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