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Time-varying Beta Risk of Pan-European Industry Portfolios: A Comparison of Alternative Modeling Techniques

Author

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  • Sascha Mergner

    (AMB Generali Asset Managers)

  • Jan Bulla

    (Georg-August-University, Goettingen)

Abstract

This paper investigates the time-varying behavior of systematic risk for eighteen pan-European sectors. Using weekly data over the period 1987- 2005, four different modeling techniques in addition to the standard constant coefficient model are employed: a bivariate t-GARCH(1,1) model, two Kalman filter based approaches, a bivariate stochastic volatility model estimated via the efficient Monte Carlo likelihood technique as well as two Markov switching models. A comparison of the different models' ex-ante forecast performances indicates that the random walk process in connection with the Kalman filter is the preferred model to describe and forecast the time-varying behavior of sector betas in a European context. Remarkably, the Markov switching models yield a worse out-of-sample performance than standard OLS.

Suggested Citation

  • Sascha Mergner & Jan Bulla, 2005. "Time-varying Beta Risk of Pan-European Industry Portfolios: A Comparison of Alternative Modeling Techniques," Finance 0510029, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0510029
    Note: Type of Document - pdf; pages: 44. Extension of an earlier paper by the first author ('Time-varying beta risk of pan-European sectors') that adds two Markov switching models to the analysis.
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    References listed on IDEAS

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    More about this item

    Keywords

    Markov switching; Kalman filter; stochastic volatility; efficient Monte Carlo likelihood; bivariate t-GARCH; European industry portfolios; time-varying beta risk;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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