Association between Markov regime-switching market volatility and beta risk: Evidence from Dow Jones industrial securities
In this paper, the volatility of the return generating process of the market portfolio and the slope coefficient of the market model is assumed to follow a Markov switching process of order one. The results indicate very strong evidence of volatility switching behaviour in a sample of returns in the S&P500 index. In three of the thirty securities in the Dow Jones index, the estimated slope in the market model show strong switching behaviour. In these three securities the low risk state is more persistent than the high-risk state. For each security we estimate the conditional probabilities that the security is in the high (low) risk state given the market is in the high (low) volatility regime and show that this information can be used to classify securities into three distinct groups. There is no association between these groups and the securities' constant beta estimated in the market model and the Sharpe index. Some directions for further research are discussed.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Schwert, G. William, 1989.
"Business cycles, financial crises, and stock volatility,"
Carnegie-Rochester Conference Series on Public Policy,
Elsevier, vol. 31(1), pages 83-125, January.
- Schwert, G.W., 1988. "Business Cycles, Financial Crises And Stock Volatility," Papers 88-06, Rochester, Business - General.
- G. William Schwert, 1989. "Business Cycles, Financial Crises, and Stock Volatility," NBER Working Papers 2957, National Bureau of Economic Research, Inc.
- Tim Bollerslev, 1986.
"Generalized autoregressive conditional heteroskedasticity,"
EERI Research Paper Series
EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
- Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
- Brooks, Robert D. & Faff, Robert W. & Lee, John H. H., 1995.
"Beta stability and portfolio formation,"
Pacific-Basin Finance Journal,
Elsevier, vol. 3(1), pages 145-146, May.
- William F. Sharpe, 1965. "Mutual Fund Performance," The Journal of Business, University of Chicago Press, vol. 39, pages 119.
- repec:bla:jbfnac:v:25:y:1998:i:5&6:p:721-745 is not listed on IDEAS
- Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
- French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
- Bos, T & Newbold, P, 1984. "An Empirical Investigation of the Possibility of Stochastic Systematic Risk in the Market Model," The Journal of Business, University of Chicago Press, vol. 57(1), pages 35-41, January.
- Boldin Michael D., 1996. "A Check on the Robustness of Hamilton's Markov Switching Model Approach to the Economic Analysis of the Business Cycle," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 1(1), pages 1-14, April.
- Gooding, Arthur E. & O'Malley, Terence P., 1977. "Market Phase and the Stationarity of Beta," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(05), pages 833-857, December.
- Ho-Chuan Huang, 2000. "Tests of regimes - switching CAPM," Applied Financial Economics, Taylor & Francis Journals, vol. 10(5), pages 573-578.
- Christopher M. Turner & Richard Startz & Charles R. Nelson, 1989.
"A Markov Model of Heteroskedasticity, Risk, and Learning in the Stock Market,"
NBER Working Papers
2818, National Bureau of Economic Research, Inc.
- Turner, Christopher M. & Startz, Richard & Nelson, Charles R., 1989. "A Markov model of heteroskedasticity, risk, and learning in the stock market," Journal of Financial Economics, Elsevier, vol. 25(1), pages 3-22, November.
- Fabozzi, Frank J & Francis, Jack Clark, 1977. "Stability Tests for Alphas and Betas over Bull and Bear Market Conditions," Journal of Finance, American Finance Association, vol. 32(4), pages 1093-1099, September.
- R.W. Faff & R.D. Brooks, 1998. "Time-varying Beta Risk for Australian Industry Portfolios: An Exploratory Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(5&6), pages 721-745.
- Goodwin, Thomas H, 1993. "Business-Cycle Analysis with a Markov-Switching Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(3), pages 331-339, July.
- Chen, Son-Nan, 1982. "An Examination of Risk-Return Relationship in Bull and Bear Markets Using Time-Varying Betas," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(02), pages 265-286, June.
- Simon van Norden & Huntley Schaller & ), 1995.
"Regime Switching in Stock Market Returns,"
- Hamilton, James D. & Susmel, Raul, 1994.
"Autoregressive conditional heteroskedasticity and changes in regime,"
Journal of Econometrics,
Elsevier, vol. 64(1-2), pages 307-333.
- Tom Doan, . "RATS programs to estimate Hamilton-Susmel Markov Switching ARCH model," Statistical Software Components RTZ00083, Boston College Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:0406011. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.