Variable versus stationary beta in the market model. A comparative analysis

Amihud Dotan; Aharon Ofer

doi:10.1016/S0378-4266(84)80044-8

Variable versus stationary beta in the market model. A comparative analysis

Amihud Dotan^*, Aharon Ofer

^*Corresponding author for this work

Finance

Research output: Contribution to journal › Article › peer-review

2 Scopus citations

Abstract

The assumption of stable beta coefficient within the context of the market model, and the consequent use of ordinary least squares. estimation, has been widely criticized. In this study an alternative market model is offered in which beta is allowed to vary over time. Varying parameters regression is used to estimate the variable beta and the estimates are compared to those produced by ordinary least squares in terms of accuracy of predictions. The results indicate that neither model shows a clear advantage over the other. Even when a large change in beta was simulated, the differences in prediction errors were rather small though slightly in favor of the varying parameters model.

Original language	English (US)
Pages (from-to)	525-534
Number of pages	10
Journal	Journal of Banking and Finance
Volume	8
Issue number	4
DOIs	https://doi.org/10.1016/S0378-4266(84)80044-8
State	Published - Dec 1984

Funding

*This study was partially supported by the Israel Institute of Business Research.

ASJC Scopus subject areas

Finance
Economics and Econometrics

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10.1016/S0378-4266(84)80044-8

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title = "Variable versus stationary beta in the market model. A comparative analysis",

abstract = "The assumption of stable beta coefficient within the context of the market model, and the consequent use of ordinary least squares. estimation, has been widely criticized. In this study an alternative market model is offered in which beta is allowed to vary over time. Varying parameters regression is used to estimate the variable beta and the estimates are compared to those produced by ordinary least squares in terms of accuracy of predictions. The results indicate that neither model shows a clear advantage over the other. Even when a large change in beta was simulated, the differences in prediction errors were rather small though slightly in favor of the varying parameters model.",

author = "Amihud Dotan and Aharon Ofer",

note = "Funding Information: *This study was partially supported by the Israel Institute of Business Research.",

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Y1 - 1984/12

N2 - The assumption of stable beta coefficient within the context of the market model, and the consequent use of ordinary least squares. estimation, has been widely criticized. In this study an alternative market model is offered in which beta is allowed to vary over time. Varying parameters regression is used to estimate the variable beta and the estimates are compared to those produced by ordinary least squares in terms of accuracy of predictions. The results indicate that neither model shows a clear advantage over the other. Even when a large change in beta was simulated, the differences in prediction errors were rather small though slightly in favor of the varying parameters model.

AB - The assumption of stable beta coefficient within the context of the market model, and the consequent use of ordinary least squares. estimation, has been widely criticized. In this study an alternative market model is offered in which beta is allowed to vary over time. Varying parameters regression is used to estimate the variable beta and the estimates are compared to those produced by ordinary least squares in terms of accuracy of predictions. The results indicate that neither model shows a clear advantage over the other. Even when a large change in beta was simulated, the differences in prediction errors were rather small though slightly in favor of the varying parameters model.

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Variable versus stationary beta in the market model. A comparative analysis

Abstract

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ASJC Scopus subject areas

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