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Time-varying estimates of CAPM betas

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  • Groenewold, Nicolaas
  • Fraser, Patricia

Abstract

It is well known that the CAPM beta is not stable over time. We investigate the nature of the time-variation in betas using monthly Australian data from 1979 to 1994 for 23 sectors. We discuss beta estimates for sub-periods and tests of the statistical adequacy of the market model used to estimate the betas. We estimate time-varying betas using recursive regressions, rolling regressions and using the Kalman Filter. We find considerable time-variation in the estimated betas and find that many are non-stationary. We estimate a simple model which explains the variation in each of the betas in terms of a time trend, allowing for a break both in level and in trend at October 1987. The model explains a large proportion of the variation in the betas over the sample period for most of the sectors.

Suggested Citation

  • Groenewold, Nicolaas & Fraser, Patricia, 1999. "Time-varying estimates of CAPM betas," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 48(4), pages 531-539.
    • Handle: RePEc:eee:matcom:v:48:y:1999:i:4:p:531-539
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    References listed on IDEAS

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    1. Brooks, Robert D. & Faff, Robert W. & Lee, John H. H., 1995. "Beta stability and portfolio formation," Pacific-Basin Finance Journal, Elsevier, vol. 3(1), pages 145-146, May.
    2. Nicolaas Groenewold, 1997. "Share Prices and Macroeconomic Factors," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(9&10), pages 1367-1383.
    3. Black, A. & Fraser, P. & Power, D., 1992. "UK unit trust performance 1980-1989: A passive time-varying approach," Journal of Banking & Finance, Elsevier, vol. 16(5), pages 1015-1033, September.
    4. Bos, T & Newbold, P, 1984. "An Empirical Investigation of the Possibility of Stochastic Systematic Risk in the Market Model," The Journal of Business, University of Chicago Press, vol. 57(1), pages 35-41, January.
    5. Nicolaas, Patricia Groenewold Fraser, 1997. "Share Prices and Macroeconomic Factors," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(9‐10), pages 1367-1383, October.
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