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Higher Order Adaptive Kalman Filter For Time Varying Alpha And Cross Market Beta Estimation In Indian Market

Author

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  • Atanu DAS

    (Department of CSE, Netaji Subhash Engineering College Kolkata, INDIA)

Abstract

First order Adaptive Kalman Filter (AKF) were successful for market risk beta estimation to accommodate the adaptive parameters better in a time varying CAPM. This paper presents a new formulation of a noise covariance adaptation based second and third order AKF for joint estimation of alpha (risk- free), co-incidental and cross market risks (betas) components of market returns in a “two factor” CAPM. Investigations reveal that the higher order AKFs perform as good as Kalman filter in spite of flexibility in the time varying noise covariance.

Suggested Citation

  • Atanu DAS, 2016. "Higher Order Adaptive Kalman Filter For Time Varying Alpha And Cross Market Beta Estimation In Indian Market," ECONOMIC COMPUTATION AND ECONOMIC CYBERNETICS STUDIES AND RESEARCH, Faculty of Economic Cybernetics, Statistics and Informatics, vol. 50(3), pages 211-228.
    • Handle: RePEc:cys:ecocyb:v:50:y:2016:i:3:p:211-228
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    References listed on IDEAS

    as
    1. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
    2. Sunder, Shyam, 1980. "Stationarity of Market Risk: Random Coefficients Tests for Individual Stocks," Journal of Finance, American Finance Association, vol. 35(4), pages 883-896, September.
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    Cited by:

    1. Ewa Feder-Sempach & Piotr Szczepocki & Wiesław Dębski, 2023. "What if beta is not stable? Applying the Kalman filter to risk estimates of top US companies over the long time horizon," Bank i Kredyt, Narodowy Bank Polski, vol. 54(1), pages 25-44.

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    More about this item

    Keywords

    Adaptive Kalman Filter; Time Varying Alpha; Cross Market Beta Estimation; Higher Order Filtering; Indian Market.;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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