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Modelling Asset Prices with Time-Varying Betas

  • Hall, Stephen G
  • Miles, David K
  • Taylor, Mark P

This paper pursues the idea that the relevant distributional moments for the Capital Asset Pricing Model (CAPM) are the conditional, rather than the unconditional, covariances of returns. Thus, asset Betas may be time-varying and random rather than constant. The model is parameterized and estimated on monthly U.K. data by an application of the Autoregressive Conditional Heteroscedasticity (ARCH) formulation of Engle and its generalization (GARCH) due to Bollerslev. We also estimate a more general model which nests the consumption-based CAPM of Breeden. The results suggest that perceptions of risk, i.e. conditional variances and covariances, are time-varying but that memories are long and agents update their perceptions relatively slowly. Despite this, measured asset Betas show substantial short-term variation. Estimates of an extended CAPM, nesting both traditional and consumption-based variants, suggest that whilst significant time-variation in risk premia is still evident, no single measure of r Copyright 1989 by Blackwell Publishers Ltd and The Victoria University of Manchester

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Article provided by University of Manchester in its journal The Manchester School of Economic & Social Studies.

Volume (Year): 57 (1989)
Issue (Month): 4 (December)
Pages: 340-56

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Handle: RePEc:bla:manch2:v:57:y:1989:i:4:p:340-56
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