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Monitoring the Parameters of the Market Model by Linear Profile Procedures

Author

Listed:
  • Ho Linda Lee

    (Escola Politécnica Universidade de São Paulo, São Paulo, Brazil. E-mail: lindalee@usp.br)

  • El Said Mahmoud

    (Faculty of Economics & Political Science, Cairo University, Cairo, Egypt. E-mail: mamahmou@vt.ed)

  • Kim Ricardo Wonseuk

    (Escola Politécnica Universidade de São Paulo, São Paulo, Brazil. E-mail: ricardowkim@yahoo.com.br)

Abstract

The method to measure the market risk (which stocks are exposed) by the slope coefficient of a linear regression model (that relates the returns of the asset and the returns of a market index) is known as Market Model. When applying this method it is extremely important to check the stability of the parameters (the slope, the intercept and the variance) over the time to neutralize the market risk. Procedures known in statistical quality control as analysis of linear profiles are presented for such purpose. By statistical tests based on the F-statistics, it is possible to identify the sources of variation and also out-of-control samples. Numerical examples illustrate the proposed procedures.

Suggested Citation

  • Ho Linda Lee & El Said Mahmoud & Kim Ricardo Wonseuk, 2010. "Monitoring the Parameters of the Market Model by Linear Profile Procedures," Stochastics and Quality Control, De Gruyter, vol. 25(1), pages 81-96, January.
    • Handle: RePEc:bpj:ecqcon:v:25:y:2010:i:1:p:81-96:n:7
    DOI: 10.1515/eqc.2010.006
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    References listed on IDEAS

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    1. William F. Sharpe, 1963. "A Simplified Model for Portfolio Analysis," Management Science, INFORMS, vol. 9(2), pages 277-293, January.
    2. Zhang, Jiujun & Li, Zhonghua & Wang, Zhaojun, 2009. "Control chart based on likelihood ratio for monitoring linear profiles," Computational Statistics & Data Analysis, Elsevier, vol. 53(4), pages 1440-1448, February.
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