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Joint conditionality in testing the beta-return relationship: Evidence based on the UK stock market

  • Morelli, David
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    This paper examines the role of beta in explaining security returns in the UK stock market over the period of 1980-2006. The conditional relationship between beta and returns is examined. Conditional covariances and variances used to estimate beta are modeled as an ARCH/GARCH process, and once estimated, the beta-return relationship is tested conditionally upon the sign of the excess market return. The implication of the sign of the excess market return follows Pettengill et al. (1995). The main contribution of this paper is that, unlike other studies, a joint conditionality is applied to test the beta-return relationship. The results show the importance of recognizing the sign of the excess market return when testing the beta-return relationship, for only then is beta found to be a significant risk measurement. The premium payment found with respect to beta represents risk payments.

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    File URL: http://www.sciencedirect.com/science/article/B6VGT-5051PJK-1/2/656f942ed1a1a7ce6b47c9a05c448029
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    Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

    Volume (Year): 21 (2011)
    Issue (Month): 1 (February)
    Pages: 1-13

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    Handle: RePEc:eee:intfin:v:21:y:2011:i:1:p:1-13
    Contact details of provider: Web page: http://www.elsevier.com/locate/intfin

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