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Cross Sectional Analysis of Stock Returns with Time-varying Beta

Asgharian, Hossein LU and Hansson, Björn LU (2000) In European Financial Management 6(2). p.33-213
Abstract
This paper analyses the ability of beta and other factors, like firm size and book-to-market, to explain cross‐sectional variation in average stock returns on the Swedish stock market for the period 1983–96. We use a bivariate GARCH(1,1) process to estimate time-varying betas for asset returns. The estimated variances of these betas, derived from a Taylor series approximation, are used for correcting errors in variables. An extreme bound analysis is utilized for testing the sensitivity of the estimated coefficients to changes in the set of included explanatory variables.



Our results show that the estimated conditional beta is a more accurate measure of the true market beta than the beta estimated by OLS. The coefficient... (More)
This paper analyses the ability of beta and other factors, like firm size and book-to-market, to explain cross‐sectional variation in average stock returns on the Swedish stock market for the period 1983–96. We use a bivariate GARCH(1,1) process to estimate time-varying betas for asset returns. The estimated variances of these betas, derived from a Taylor series approximation, are used for correcting errors in variables. An extreme bound analysis is utilized for testing the sensitivity of the estimated coefficients to changes in the set of included explanatory variables.



Our results show that the estimated conditional beta is a more accurate measure of the true market beta than the beta estimated by OLS. The coefficient for beta is not significantly different from zero, while the variables book-to-market and leverage have significant coefficients, and the latter coefficients are also robust to model specification. Excluding the down turn 1990–92 from the sample shows that the significance of the risk premium for leverage might be considered as an industry effect during this extreme (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
cross-sectional multifactor model, Swedish stock returns, time-varying beta, errors in variables, extreme bound analysis
in
European Financial Management
volume
6
issue
2
pages
33 - 213
publisher
Wiley-Blackwell
ISSN
1354-7798
DOI
10.1111/1468-036X.00121
language
English
LU publication?
yes
id
020fe3ce-b9cc-4db0-a81d-8624e6bd2263 (old id 1384706)
date added to LUP
2009-04-20 12:27:14
date last changed
2016-04-15 19:55:05
@article{020fe3ce-b9cc-4db0-a81d-8624e6bd2263,
  abstract     = {This paper analyses the ability of beta and other factors, like firm size and book-to-market, to explain cross‐sectional variation in average stock returns on the Swedish stock market for the period 1983–96. We use a bivariate GARCH(1,1) process to estimate time-varying betas for asset returns. The estimated variances of these betas, derived from a Taylor series approximation, are used for correcting errors in variables. An extreme bound analysis is utilized for testing the sensitivity of the estimated coefficients to changes in the set of included explanatory variables.<br/><br>
<br/><br>
Our results show that the estimated conditional beta is a more accurate measure of the true market beta than the beta estimated by OLS. The coefficient for beta is not significantly different from zero, while the variables book-to-market and leverage have significant coefficients, and the latter coefficients are also robust to model specification. Excluding the down turn 1990–92 from the sample shows that the significance of the risk premium for leverage might be considered as an industry effect during this extreme},
  author       = {Asgharian, Hossein and Hansson, Björn},
  issn         = {1354-7798},
  keyword      = {cross-sectional multifactor model,Swedish stock returns,time-varying beta,errors in variables,extreme bound analysis},
  language     = {eng},
  number       = {2},
  pages        = {33--213},
  publisher    = {Wiley-Blackwell},
  series       = {European Financial Management},
  title        = {Cross Sectional Analysis of Stock Returns with Time-varying Beta},
  url          = {http://dx.doi.org/10.1111/1468-036X.00121},
  volume       = {6},
  year         = {2000},
}