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Time Varying Beta Risk: An Analysis of Alternative Modelling Techniques

  • Robert W. Faff

    (Royal Melbourne Institute of Technology, Australia,)

  • David Hillier
  • Joseph Hillier

This paper investigates the performance of three different approaches to modelling time-variation in conditional asset betas: GARCH models, the extended market model of Schwert and Seguin (1990) and the Kalman Filter algorithm. Using daily UK industry returns, we find the simple market model beta to be as efficient as the more complicated GARCH type models. However, the Kalman Filter algorithm incorporating a random walk parameterisation dominates all other models under the mean-square error criterion. Finally, we provide strong evidence that a combination of the methods under investigation may lead to considerably more powerful estimators of the time-variation in conditional beta. Copyright Blackwell Publishers Ltd 2000.

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Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

Volume (Year): 27 (2000-06)
Issue (Month): 5&6 ()
Pages: 523-554

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Handle: RePEc:bla:jbfnac:v:27:y:2000-06:i:5&6:p:523-554
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