TY - JOUR
T1 - Variable versus stationary beta in the market model. A comparative analysis
AU - Dotan, Amihud
AU - Ofer, Aharon
N1 - Funding Information:
*This study was partially supported by the Israel Institute of Business Research.
PY - 1984/12
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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U2 - 10.1016/S0378-4266(84)80044-8
DO - 10.1016/S0378-4266(84)80044-8
M3 - Article
AN - SCOPUS:58149367732
SN - 0378-4266
VL - 8
SP - 525
EP - 534
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
IS - 4
ER -