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Testing for Nonstationarity of Market Risk: An Exact Test and Power Considerations

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  • Simonds, Richard R.
  • LaMotte, Lynn Roy
  • McWhorter, Archer

Abstract

This paper reexamines the issue of common stock market risk stationarity by applying a newly available exact test for random-walk regression coefficients. For each eight-year subperiod tested in the 1951–1974 interval, betas for individual New York Stock Exchange-listed stocks appeared to be nonstationary. The statistical powers of the exact test and of locally most powerful tests are compared to the power of the test employed previously by Sunder. These power considerations are cited to explain the differences between test results obtained here and those reported by Sunder.

Suggested Citation

  • Simonds, Richard R. & LaMotte, Lynn Roy & McWhorter, Archer, 1986. "Testing for Nonstationarity of Market Risk: An Exact Test and Power Considerations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(2), pages 209-220, June.
    • Handle: RePEc:cup:jfinqa:v:21:y:1986:i:02:p:209-220_01
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    Cited by:

    1. Brooks, Robert D. & Faff, Robert W. & Yew, Kee Ho, 1997. "A new test of the relationship between regulatory change in financial markets and the stability of beta risk of depository institutions," Journal of Banking & Finance, Elsevier, vol. 21(2), pages 197-219, February.
    2. Brooks, Robert D. & Faff, Robert W. & Ariff, Mohamed, 1998. "An investigation into the extent of beta instability in the Singapore stock market," Pacific-Basin Finance Journal, Elsevier, vol. 6(1-2), pages 87-101, May.
    3. Yue-Jun Zhang & Yi-Ming Wei, 2011. "The dynamic influence of advanced stock market risk on international crude oil returns: an empirical analysis," Quantitative Finance, Taylor & Francis Journals, vol. 11(7), pages 967-978.
    4. Keith Lam, 1999. "Some evidence on the distribution of beta in Hong Kong," Applied Financial Economics, Taylor & Francis Journals, vol. 9(3), pages 251-262.
    5. Francisco José López-Arceiz & Ana José Bellostas-Pérezgrueso & José Mariano Moneva, 2018. "Evaluation of the Cultural Environment’s Impact on the Performance of the Socially Responsible Investment Funds," Journal of Business Ethics, Springer, vol. 150(1), pages 259-278, June.
    6. Ortas, E. & Salvador, M. & Moneva, J.M., 2015. "Improved beta modeling and forecasting: An unobserved component approach with conditional heteroscedastic disturbances," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 27-51.
    7. Ortas, Eduardo & Moneva, José M. & Salvador, Manuel, 2012. "Does socially responsible investment equity indexes in emerging markets pay off? Evidence from Brazil," Emerging Markets Review, Elsevier, vol. 13(4), pages 581-597.
    8. Markus Ebner & Thorsten Neumann, 2008. "Time-varying factor models for equity portfolio construction," The European Journal of Finance, Taylor & Francis Journals, vol. 14(5), pages 381-395.
    9. M. V. Esteban & E. Ferreira & S. Orbe-Mandaluniz, 2015. "Nonparametric methods for estimating and testing for constant betas in asset pricing models," Applied Economics, Taylor & Francis Journals, vol. 47(25), pages 2577-2607, May.
    10. Malevergne, Y. & Sornette, D., 2007. "Self-consistent asset pricing models," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 382(1), pages 149-171.
    11. Syed Abuzar Moonis & Ajay Shah, 2003. "Testing for Time-variation in Beta in India," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 2(2), pages 163-180, May.

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