Instability of stock beta in Dhaka Stock Exchange, Bangladesh
Purpose – The purpose of this paper is to examine the nature and extent of instability of capital asset pricing model (CAPM) beta in a small emerging capital market. Design/methodology/approach – Inter-period as well as intra beta instability are examined. Inter-period instability is examined by Mann-Whitney z-scores and Blume's regressions. Intra-period beta instability is examined using Bruesch-Pagan LM test and Chow break point test. Robustness tests are performed applying time-varying parameter models. Findings – Beta instability increases with increase in holding (sample) periods. There is evidence of inter-period as well as intra-period beta instability. Analysis of the full eight-year interval reveals a very high incidence of beta instability, namely, about 26 per cent of the individual stocks tested and about 31 per cent of individual stocks have structural break. The extent of beta instability does not significantly decline when corrected for non-synchronous trading and thin trading as represented by Dimson beta. However, the extent of beta instability is similar to that of developed market. Time-varying parameter model under Kalman filter approach using AR(1) specification performs better than any other models in terms of in-sample forecast errors. Dominance of AR(1) approach suggests that stock betas in DSE are time varying, and shocks to the conditional beta have some degree of persistence which ultimately reverts to a mean. This result is in contrast to the findings of Faff et al. revealing the dominance of Random Walk specification in Australian market, suggesting that shocks to stock beta in Australian market persist indefinitely into the future. These contrasting findings may indicate that beta instability in different markets and for different stocks in the same market are of different nature and different models may be suitable for different markets and different stocks in the same market in capturing the time-varying nature of beta coefficients. Research limitations/implications – This study covers only 110 stocks of Dhaka Stock Exchange. It can be extended to include more stocks. The study can also be done in other developing markets. Originality/value – While the issues of beta instability have been extensively explored for developed markets, evidence for emerging markets is less readily available. The present study contributes to the emerging market literature on beta instability by investigating the extent of beta instability and its time-varying properties in Dhaka Stock Exchange (DSE), Bangladesh. Understanding the systematic risk behaviour of individual stocks in DSE is important for both local and international investors. With the saturation of investment opportunities in developed markets due to their high integration, and with the enhanced deregulation and liberalization of emerging economies, emerging financial markets like DSE provide suitable and a relatively safe investment environment for international investors and fund managers seeking global diversification for better risk-return trade-offs. When most of the world markets declined during the recent global financial crisis, stock prices in DSE experienced a continuous rise. This makes it more interesting as an emerging market to study beta instability.
Volume (Year): 36 (2010)
Issue (Month): 10 (October)
|Contact details of provider:|| Web page: http://www.emeraldinsight.com|
|Order Information:|| Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK|
Web: http://emeraldgrouppublishing.com/products/journals/journals.htm?id=mf Email:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alexander, Gordon J. & Benson, P. George & Eger, Carol E., 1982. "Timing Decisions and the Behavior of Mutual Fund Systematic Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(04), pages 579-602, November.
- Brooks, Robert D & Faff, Robert W, 1995.
"Financial Market Deregulation and Bank Risk: Testing for Beta Instability,"
Australian Economic Papers,
Wiley Blackwell, vol. 34(65), pages 180-99, December.
- Brooks, R. & Faff, R., 1995. "Financial Market Deregulation and Bank Risk: Testing for Beta Instability," Papers 95-3, Melbourne - Centre in Finance.
- Brooks, Robert D. & Faff, Robert W. & Lee, John H. H., 1995.
"Beta stability and portfolio formation,"
Pacific-Basin Finance Journal,
Elsevier, vol. 3(1), pages 145-146, May.
- Francis, Jack Clark & Fabozzi, Frank J., 1980. "Stability of mutual fund systematic risk statistics," Journal of Business Research, Elsevier, vol. 8(2), pages 263-275, June.
- Markus Ebner & Thorsten Neumann, 2005. "Time-Varying Betas of German Stock Returns," Financial Markets and Portfolio Management, Springer, vol. 19(1), pages 29-46, June.
- Collins, Daniel W & Ledolter, Johannes & Rayburn, Judy Dawson, 1987. "Some Further Evidence on the Stochastic Properties of Systematic Risk," The Journal of Business, University of Chicago Press, vol. 60(3), pages 425-48, July.
- Shyh-Wei Chen & Nai-Chuan Huang, 2007. "Estimates of the ICAPM with regime-switching betas: evidence from four pacific rim economies," Applied Financial Economics, Taylor & Francis Journals, vol. 17(4), pages 313-327.
- Faff, R. & Brooks, R., 1996. "Further Evidence on the Relationship between Beta Stability and the length of the Estimation Period," Papers 96-10, Melbourne - Centre in Finance.
- Keith Lam, 1999. "Some evidence on the distribution of beta in Hong Kong," Applied Financial Economics, Taylor & Francis Journals, vol. 9(3), pages 251-262.
- Brooks, Robert D. & Faff, Robert W. & Ariff, Mohamed, 1998. "An investigation into the extent of beta instability in the Singapore stock market," Pacific-Basin Finance Journal, Elsevier, vol. 6(1-2), pages 87-101, May.
- Sascha Mergner & Jan Bulla, 2008.
"Time-varying beta risk of Pan-European industry portfolios: A comparison of alternative modeling techniques,"
The European Journal of Finance,
Taylor & Francis Journals, vol. 14(8), pages 771-802.
- Sascha Mergner & Jan Bulla, 2005. "Time-varying Beta Risk of Pan-European Industry Portfolios: A Comparison of Alternative Modeling Techniques," Finance 0510029, EconWPA.
- Lee, Cheng F. & Chen, Carl R., 1982. "Beta stability and tendency : An application of a variable mean response regression model," Journal of Economics and Business, Elsevier, vol. 34(3), pages 201-206.
- Robert Brooks & Robert Faff & Thomas Josev, 1997. "Beta stability and monthly seasonal effects: evidence from the Australian capital market," Applied Economics Letters, Taylor & Francis Journals, vol. 4(9), pages 563-566.
- Alexander, Gordon J. & Benson, P. George, 1982. "More on Beta as a Random Coefficient," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(01), pages 27-36, March.
- Breusch, T S & Pagan, A R, 1979. "A Simple Test for Heteroscedasticity and Random Coefficient Variation," Econometrica, Econometric Society, vol. 47(5), pages 1287-94, September.
- Stephen X. H. Gong & Michael Firth & Kevin Cullinane, 2006. "Beta Estimation and Stability in the US-Listed International Transportation Industry," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 9(03), pages 463-490.
- Dimson, Elroy, 1979. "Risk measurement when shares are subject to infrequent trading," Journal of Financial Economics, Elsevier, vol. 7(2), pages 197-226, June.
- Blume, Marshall E, 1975. "Betas and Their Regression Tendencies," Journal of Finance, American Finance Association, vol. 30(3), pages 785-95, June.
- Turan G. Bali & Nusret Cakici & Yi Tang, 2009. "The Conditional Beta and the Cross-Section of Expected Returns," Financial Management, Financial Management Association International, vol. 38(1), pages 103-137, 03.
- Bos, T & Newbold, P, 1984. "An Empirical Investigation of the Possibility of Stochastic Systematic Risk in the Market Model," The Journal of Business, University of Chicago Press, vol. 57(1), pages 35-41, January.
- Fabozzi, Frank J. & Francis, Jack Clark, 1978. "Beta as a Random Coefficient," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(01), pages 101-116, March.
- Garbade, Kenneth & Rentzler, Joel, 1981. "Testing the Hypothesis of Beta Stationarity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(3), pages 577-87, October.
When requesting a correction, please mention this item's handle: RePEc:eme:mfipps:v:36:y:2010:i:10:p:886-902. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Louise Lister)
If references are entirely missing, you can add them using this form.