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Time varying country risk: an assessment of alternative modelling techniques

  • R. D. Brooks
  • R. W. Faff
  • M. McKenzie

Three different techniques for the estimation of a time-varying beta are investigated: a bivariate GARCH model, the Schwert and Seguin approach, and the Kalman filter method. These approaches are applied to a set of monthly Morgan Stanley country index data over the period 1970 to 1995 and their relative performances compared. In-sample forecast tests of the performance of each of these methods for generating conditional beta suggest that the GARCH-based estimates of risk generate the lowest forecast error although these are not necessarily significantly less than those generated by the other techniques considered.

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Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

Volume (Year): 8 (2002)
Issue (Month): 3 ()
Pages: 249-274

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Handle: RePEc:taf:eurjfi:v:8:y:2002:i:3:p:249-274
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