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Time-Varying Betas and Cross-Sectional Return-Risk Relation: Evidence from the UK

Author

Listed:
  • Fraser, P.
  • Hamelink, F.
  • Hoesli, M.
  • MacGregor, B.

Abstract

The seminal study by Fama and MacBeth (1973) initiated a stream of papers testing for the cross-sectional relation between return and risk. The debate wether beta is a valid measure of risk has been renimated by Fama and French (1992) and subsequent studies. Rather than focusing on exogenous variables that have a larger explanatory power than an asset's beta in cross sectional tests, we assume the matrix of variances-covariances to follow a time varying ARCH process. Using monthly data from the UK market from February 1975 to December 1996, we compare the cross sectional return-risk relations obtained with an unconditional specification for asset's betas to those obtained when the estimated betas are based on an ARCH model. We also investigate the Pettengill, Sundaram and Mathure (1995) approach, which allows a negative cross sectional return-risk relation in periods in which the market portfolio yields a negative return relative to the risk free rate. These tests are also carried out on samples pertaining to a specific month and on samples from which a particular month is removed. Our result suggest that CAPM holds in downward moving markets than in upward moving markets hence beta is a more appropriate measure of risk in bear markets.

Suggested Citation

  • Fraser, P. & Hamelink, F. & Hoesli, M. & MacGregor, B., 2000. "Time-Varying Betas and Cross-Sectional Return-Risk Relation: Evidence from the UK," Papers 2000.03, Ecole des Hautes Etudes Commerciales, Universite de Geneve-.
    • Handle: RePEc:fth:ehecge:2000.03
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    Citations

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    Cited by:

    1. Don U.A. Galagedera, 2004. "A survey on risk-return analysis," Finance 0406010, University Library of Munich, Germany.
    2. Syed ali, Raza & Syed tehseen, jawaid & Imtiaz, arif & Fahim, qazi, 2011. "Validity of capital asset pricing model: evidence from Karachi stock exchange," MPRA Paper 32737, University Library of Munich, Germany.
    3. Valadkhani, Abbas, 2022. "Do large-cap exchange-traded funds perform better than their small-cap counterparts in extreme market conditions?☆," Global Finance Journal, Elsevier, vol. 53(C).
    4. Joliet, Robert & Hubner, Georges, 2008. "Corporate international diversification and the cost of equity: European evidence," Journal of International Money and Finance, Elsevier, vol. 27(1), pages 102-123, February.
    5. Mohammad Abu Sayeed & Mardi Dungey & Wenying Yao, 2018. "High-frequency Characterisation of Indian Banking Stocks," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 17(2_suppl), pages 213-238, August.
    6. Muhammad Hanif & Abdullah Iqbal & Zulfiqar Shah, 2016. "Risk and Returns of Sharīʿah Compliant Stocks on the Karachi Stock Exchange – A CAPM and SCAPM Approach المخاطر والعوائد في مقطع عرضي من الأسهم المتوافقة مع الشريعة: اختبار متانة التطبيق وعيوب نموذج ت," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 29(2), pages 37-54, January.
    7. Durand, Robert B. & Lan, Yihui & Ng, Andrew, 2011. "Conditional beta: Evidence from Asian emerging markets," Global Finance Journal, Elsevier, vol. 22(2), pages 130-153.
    8. Roland Shami & Don U.A. Galagedera, 2004. "Beta Risk and Regime Shift in Market Volatility," Finance 0406012, University Library of Munich, Germany.
    9. Hassan Zada & Naveed Khan & Kai-Yin Woo & Sana Gaied Chortane, 2025. "Asset Pricing: A Comparative Analysis of Fama-French Five-Factor with Human Capital-Based Six-Factor Model," Advances in Decision Sciences, Asia University, Taiwan, vol. 29(4), pages 1-37.
    10. Seth Armitage & Janusz Brzeszczynski, 2011. "Heteroscedasticity and interval effects in estimating beta: UK evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 21(20), pages 1525-1538.
    11. Dr. Ibrahim Onour, "undated". "The Global Financial Crisis and Equity Markets in Middle East Oil Exporting Countries," API-Working Paper Series 1009, Arab Planning Institute - Kuwait, Information Center.
    12. Guermat, Cherif & Freeman, Mark C., 2010. "A net beta test of asset pricing models," International Review of Financial Analysis, Elsevier, vol. 19(1), pages 1-9, January.

    More about this item

    Keywords

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General

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