Cross Sectional Analysis of Stock Returns with Time-varying Beta

Research output: Contribution to journalArticle

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 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

Details

Authors
Organisations
Research areas and keywords

Subject classification (UKÄ) – MANDATORY

  • Economics

Keywords

  • cross-sectional multifactor model, Swedish stock returns, time-varying beta, errors in variables, extreme bound analysis
Original languageEnglish
Pages (from-to)213-33
JournalEuropean Financial Management
Volume6
Issue number2
Publication statusPublished - 2000
Publication categoryResearch
Peer-reviewedYes