NDLI: The pricing of time-varying beta

Content Provider	Springer Nature Link
Author	González Rivera, Gloria
Copyright Year	1997
Abstract	We generalize an asset pricing model based on the Arbitrage Pricing Theory (APT) allowing beta to be time-varying. Making beta a random variable adds flexibility to the model because permits a non-linear relation between individual returns and the set of factors, and accounts for the effect of possible omitted variables. We integrate the conditional APT with a general linear stochastic process for beta. We analyze the behavior of the conditional expected return, the conditional variance and conditional covariance of individual asset returns as functions of the conditional moments of beta. On considering time-varying betas we introduce another source of uncertainty (risk) independent of the factors. We need to disentangle if this extra risk is systematic or non-systematic. To this end, we introduce a modified conditional APT model that rationalizes why the time variation of beta may represent extra systematic risk. For a sample of individual stocks, we test the hypothesis of time-varying beta and the feasibility of the modified conditional APT. We present a test for time-varying beta based on the conditional second moments of returns. We find that there is strong evidence against constancy of betas in favor of a random coefficient model, and that the time variation of beta is due to non-systematic behavior of the firms and investors should be able to diversify this risk away.
Starting Page	345
Ending Page	363
Page Count	19
File Format	PDF
ISSN	03777332
Journal	Empirical Economics
Volume Number	22
Issue Number	3
e-ISSN	14358921
Language	English
Publisher	Physica-Verlag
Publisher Date	1997-01-01
Publisher Place	Heidelberg
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	APT beta (G)ARCH Systematic Risk Statistics for Business/Economics/Mathematical Finance/Insurance Economics general Econometrics Economic Theory
Content Type	Text
Resource Type	Article
Subject	Statistics and Probability Social Sciences Economics and Econometrics

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