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Time-Varying Betas of German Stock Returns

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  • Markus Ebner

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  • Thorsten Neumann

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Abstract

The market model assumes stock returns to be a linear function of the market return. However, there is considerable evidence that the beta stability assumption commonly used when estimating the market model is invalid. In this paper we account for beta instability in German stock returns by allowing the coefficients to vary over time in estimation. For time-varying beta estimation we rely on the Flexible Least Squares approach, the Random Walk Model and Moving Window Least Squares. Due to our results time-varying estimation fits the data considerably better than time-invariant estimation and, hence, increases the efficiency of beta based risk measurement. Copyright Swiss Society for Financial Market Research 2005

Suggested Citation

  • Markus Ebner & Thorsten Neumann, 2005. "Time-Varying Betas of German Stock Returns," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 19(1), pages 29-46, June.
  • Handle: RePEc:kap:fmktpm:v:19:y:2005:i:1:p:29-46
    DOI: 10.1007/s11408-005-2296-5
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    References listed on IDEAS

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    9. Kalaba, Robert E. & Tesfatsion, Leigh S., 1989. "Time-Varying Linear Regression Via Flexible Least Squares," Staff General Research Papers Archive 11196, Iowa State University, Department of Economics.
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    Cited by:

    1. Abu Taher Mollik & M. Khokan Bepari, 2010. "Instability of stock beta in Dhaka Stock Exchange, Bangladesh," Managerial Finance, Emerald Group Publishing, vol. 36(10), pages 886-902, August.
    2. Zhou, Jian, 2013. "Conditional market beta for REITs: A comparison of modeling techniques," Economic Modelling, Elsevier, vol. 30(C), pages 196-204.
    3. Chadwick, Meltem, 2010. "Modelling Time-varying Bond Risk Premia for Utilities Industry," MPRA Paper 75840, University Library of Munich, Germany.
    4. Esteban González, María Victoria & Tusell Palmer, Fernando Jorge, 2009. "Predicting Betas: Two new methods," BILTOKI 2009-01, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística).
    5. Xiaoquan Jiang, 2010. "Return dispersion and expected returns," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 24(2), pages 107-135, June.

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