Does Beta React to Market Conditions? Estimates of Bull and Bear Betas using a Nonlinear Market Model with an Endogenous Threshold Parameter

George Woodward and Heather M. Anderson

No 9/03, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: We apply a logistic smooth transition market model (LSTM) to a sample of returns on Australian industry portfolios to investigate whether bull and bear market betas differ. Unlike other studies, our LSTM model allows for smooth transition between bull and bear states and allows the data to determine the threshold value. The estimated value of the smoothness parameter was very large for all industries implying that transition is abrupt. Therefore we estimated the threshold as a parameter along with the two betas in a dual beta market (DBM) framework using a sequential conditional least squares (SCLS) method. Using Lagrange Multiplier type tests of linearity, and the SCLS method our results indicate that for all but two industries the bull and bear betas are significantly different.

Keywords: Logistic Smooth Transition Market Model (LSTM); Sequential Conditional Least Squares (SCLS); Linearity Tests; Bull/Bear Betas (search for similar items in EconPapers)
JEL-codes: G12 G14 C50 C51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-ets, nep-fin and nep-rmg
Date: 2003-04
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