Financial turbulence and beta estimation
This study identifies periods of turbulence within financial markets. Capital Asset Pricing Model (CAPM) betas estimated during tranquil periods exhibit little relation between estimated risk and average returns, and further, a majority of considered portfolios exhibit significant abnormal performance, given the tranquil or full-sample beta estimate. However, betas estimated from turbulent subperiods exhibit a strong relation between risk and return. Further, given turbulent betas, the observed performance is frequently consistent with the CAPM. Market betas for small and value portfolios increase during turbulent periods, indicating that the risk of these portfolios is greater than those indicated by standard betas.
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Volume (Year): 23 (2013)
Issue (Month): 3 (February)
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