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Does beta react to market conditions? Estimates of 'bull' and 'bear' betas using a nonlinear market model with an endogenous threshold parameter

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  • George Woodward
  • Heather Anderson

Abstract

The authors use a logistic smooth transition market (LSTM) model to investigate whether 'bull' and 'bear' market betas for Australian industry portfolios returns differ. The LSTM model allows the data to determine a threshold parameter that differentiates between 'bull' and 'bear' states, and it also allows for smooth transition between these two states. Their results indicate that 'bull' and 'bear' betas are significantly different for most industries, and that up-market risk is not always lower than down-market risk. LSTM models indicate that the transition between 'bull' and 'bear' states is abrupt, supporting a dual-beta market modelling framework.

Suggested Citation

  • George Woodward & Heather Anderson, 2009. "Does beta react to market conditions? Estimates of 'bull' and 'bear' betas using a nonlinear market model with an endogenous threshold parameter," Quantitative Finance, Taylor & Francis Journals, vol. 9(8), pages 913-924.
    • Handle: RePEc:taf:quantf:v:9:y:2009:i:8:p:913-924
    DOI: 10.1080/14697680802595643
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    More about this item

    Keywords

    Bull and bear betas; Dual-beta market (DBM); Models; Linearity tests; Logistic smooth transition market (LSTM) models; Sequential conditional least squares (SCLS);
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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