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

Amihud Dotan*, Aharon Ofer

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

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 languageEnglish
Pages (from-to)525-534
Number of pages10
JournalJournal of Banking and Finance
Volume8
Issue number4
DOIs
StatePublished - Dec 1984

Funding

FundersFunder number
Israel Institute of Business Research

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