Conditional risk–return relationship in a time-varying beta model

Abstract

We investigate the asymmetric risk-return relationship in a time-varying beta CAPM. A state space model is established and estimated by the Adaptive Least Squares with Kalman foundations proposed by McCulloch (2006). Using S&P 500 daily data from 1987:11-2003:12, we find a positive risk-return relationship in the up market (positive market excess returns) and a negative relationship in the down market (negative market excess returns). This supports the argument by Pettengill, Sundaram and Mathur (1995), who use a constant beta model. However, our model outperforms theirs by eliminating the unexplained returns and improving the accuracy of the estimated risk price.

Testing the CAPM for the Brazilian Stock Market Using Multivariate GARCH between 1995 and 2012

“…Unlike Hueng and Huang (2008), this work did not find an asymmetric relation between risk and return, because the dynamic betas estimated have values close to the static betas estimated for Brazilian market by Godeiro (2012).…”

“…The research of Hueng and Huang (2008) examined the daily closing prices of 358 assets comprising the S & P 500 from 1987 to 2003. The authors compose their portfolios according to market sectors which companies belong.…”

Testing the CAPM for the Brazilian Stock Market: A Study of Dynamic Beta Using Multivariate GARCH

“…Unlike Hueng and Huang (2008), this work did not find an asymmetric relation between risk and return, because the dynamic betas estimated have values close to the static betas estimated for Brazilian market by Godeiro Vol. 5, No.…”

“…Hueng and Huang (2008) investigated the asymmetrical relationship between risk and return using the CAPM with time-varying betas. The authors specify with the following equation the time-varying betas:…”

A net beta test of asset pricing models

“…Girarda et al (2003) investigate nine Asian markets using the CBT methodology augmented to allow for conditional heteroskedasticity in stock returns. For the rest of the world, Fa¤ (2001) presents results for Australia, Sandoval and Saens (2004) for Latin America and Huang and Hueng (2008) for the US when betas are time-varying. Basher and Sadorsky (2006) use the CBT methodology to examine the impact of oil prices on emerging market stock returns.…”