Time-varying Beta Risk of Pan-European Sectors: A Comparison of Alternative Modeling Techniques

Sascha Mergner ()

Finance from EconWPA

Abstract: This paper investigates the time-varying behavior of systematic risk for eighteen pan-European industry portfolios. Using weekly data over the period 1987-2005, three different modeling techniques in addition to the standard constant coefficient model are employed: a bivariate t- GARCH(1,1) model, two Kalman filter based approaches as well as a bivariate stochastic volatility model estimated via the efficient Monte Carlo likelihood technique. A comparison of the different models' ex- ante forecast performances indicates that the random-walk process in connection with the Kalman filter is the preferred model to describe and forecast the time-varying behavior of sector betas in a European context.

Keywords: Time-varying beta risk; Kalman filter; bivariate t-GARCH; stochastic volatility; efficient Monte Carlo likelihood; European industry portfolios (search for similar items in EconPapers)
JEL-codes: C22 C32 G10 G12 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-fin, nep-fmk and nep-for
Date: 2005-09-21
Note: Type of Document - pdf; pages: 38. 38 pages, pdf-file
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0509024

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