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Cross‐sectional analysis of Swedish stock returns with time‐varying beta: the Swedish stock market 1983–96

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  • Hossein Asgharian
  • Björn Hansson

Abstract

This paper analyses the ability of beta and other factors, like firm size and book‐to‐market, to explain cross‐sectional variation in average stock returns on the Swedish stock market for the period 1983–96. We use a bivariate GARCH(1,1) process to estimate time‐varying betas for asset returns. The estimated variances of these betas, derived from a Taylor series approximation, are used for correcting errors in variables. An extreme bound analysis is utilized for testing the sensitivity of the estimated coefficients to changes in the set of included explanatory variables. Our results show that the estimated conditional beta is a more accurate measure of the true market beta than the beta estimated by OLS. The coefficient for beta is not significantly different from zero, while the variables book‐to‐market and leverage have significant coefficients, and the latter coefficients are also robust to model specification. Excluding the down turn 1990–92 from the sample shows that the significance of the risk premium for leverage might be considered as an industry effect during this extreme period. Finally, we find a close dependence between the risk premium for beta and that for size and book‐to‐market. The omission of each of these variables may cause statistical bias in the estimated coefficient for beta.

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  • Hossein Asgharian & Björn Hansson, 2000. "Cross‐sectional analysis of Swedish stock returns with time‐varying beta: the Swedish stock market 1983–96," European Financial Management, European Financial Management Association, vol. 6(2), pages 213-233, June.
    • Handle: RePEc:bla:eufman:v:6:y:2000:i:2:p:213-233
    DOI: 10.1111/1468-036X.00121
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    Cited by:

    1. Hossein Asgharian & Charlotte Christiansen & Ai Jun Hou & Weining Wang, 2017. "Long- and Short-Run Components of Factor Betas: Implications for Equity Pricing," CREATES Research Papers 2017-34, Department of Economics and Business Economics, Aarhus University.
    2. Asgharian, Hossein & Christiansen, Charlotte & Hou, Ai Jun & Wang, Weining, 2021. "Long- and short-run components of factor betas: Implications for stock pricing," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
    3. Jiri Novak, 2015. "Systematic Risk Changes, Negative Realized Excess Returns and Time-Varying CAPM Beta," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 65(2), pages 167-190, April.
    4. Kolani Pamane & Anani Ekoue Vikpossi, 2014. "An Analysis of the Relationship between Risk and Expected Return in the BRVM Stock Exchange: Test of the CAPM," Research in World Economy, Research in World Economy, Sciedu Press, vol. 5(1), pages 13-28, March.
    5. Eun, Cheol S. & Huang, Wei, 2007. "Asset pricing in China's domestic stock markets: Is there a logic?," Pacific-Basin Finance Journal, Elsevier, vol. 15(5), pages 452-480, November.
    6. Ben Sita, Bernard, 2018. "Estimating the beta-return relationship by considering the sign and the magnitude of daily returns," The Quarterly Review of Economics and Finance, Elsevier, vol. 67(C), pages 28-35.
    7. Bo Hansson, 2004. "Human Capital and Stock Returns: Is the Value Premium an Approximation for Return on Human Capital?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(3-4), pages 333-358.

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