Cross Sectional Analysis of Stock Returns with Time-varying Beta

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Cross Sectional Analysis of Stock Returns with Time-varying Beta. / Asgharian, Hossein; Hansson, Björn.

In: European Financial Management, Vol. 6, No. 2, 2000, p. 213-33.

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TY - JOUR

T1 - Cross Sectional Analysis of Stock Returns with Time-varying Beta

AU - Asgharian, Hossein

AU - Hansson, Björn

PY - 2000

Y1 - 2000

N2 - 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

AB - 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

KW - cross-sectional multifactor model

KW - Swedish stock returns

KW - time-varying beta

KW - errors in variables

KW - extreme bound analysis

U2 - 10.1111/1468-036X.00121

DO - 10.1111/1468-036X.00121

M3 - Article

VL - 6

SP - 213

EP - 233

JO - European Financial Management

JF - European Financial Management

SN - 1354-7798

IS - 2

ER -