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Time-varying Beta Risk of Pan-European Industry Portfolios: A Comparison of Alternative Modeling Techniques

  • Sascha Mergner

    (AMB Generali Asset Managers)

  • Jan Bulla

    (Georg-August-University, Goettingen)

This paper investigates the time-varying behavior of systematic risk for eighteen pan-European sectors. Using weekly data over the period 1987- 2005, four different modeling techniques in addition to the standard constant coefficient model are employed: a bivariate t-GARCH(1,1) model, two Kalman filter based approaches, a bivariate stochastic volatility model estimated via the efficient Monte Carlo likelihood technique as well as two Markov switching models. A comparison of the different models' ex-ante forecast performances indicates that the random walk process in connection with the Kalman filter is the preferred model to describe and forecast the time-varying behavior of sector betas in a European context. Remarkably, the Markov switching models yield a worse out-of-sample performance than standard OLS.

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File URL: http://econwpa.repec.org/eps/fin/papers/0510/0510029.pdf
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Paper provided by EconWPA in its series Finance with number 0510029.

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Length: 44 pages
Date of creation: 26 Oct 2005
Date of revision:
Handle: RePEc:wpa:wuwpfi:0510029
Note: Type of Document - pdf; pages: 44. Extension of an earlier paper by the first author ('Time-varying beta risk of pan-European sectors') that adds two Markov switching models to the analysis.
Contact details of provider: Web page: http://econwpa.repec.org

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