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Time-varying Beta Risk of Pan-European Sectors: A Comparison of Alternative Modeling Techniques

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  • Sascha Mergner

    (AMB Generali Asset Managers)

Abstract

This paper investigates the time-varying behavior of systematic risk for eighteen pan-European industry portfolios. Using weekly data over the period 1987-2005, three different modeling techniques in addition to the standard constant coefficient model are employed: a bivariate t- GARCH(1,1) model, two Kalman filter based approaches as well as a bivariate stochastic volatility model estimated via the efficient Monte Carlo likelihood technique. A comparison of the different models' ex- ante forecast performances indicates that the random-walk process in connection with the Kalman filter is the preferred model to describe and forecast the time-varying behavior of sector betas in a European context.

Suggested Citation

  • Sascha Mergner, 2005. "Time-varying Beta Risk of Pan-European Sectors: A Comparison of Alternative Modeling Techniques," Finance 0509024, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0509024
    Note: Type of Document - pdf; pages: 38. 38 pages, pdf-file
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    References listed on IDEAS

    as
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    Cited by:

    1. He, Zhongzhi (Lawrence) & Kryzanowski, Lawrence, 2008. "Dynamic betas for Canadian sector portfolios," International Review of Financial Analysis, Elsevier, vol. 17(5), pages 1110-1122, December.

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    More about this item

    Keywords

    Time-varying beta risk; Kalman filter; bivariate t-GARCH; stochastic volatility; efficient Monte Carlo likelihood; European industry portfolios;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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