Modelling the Equity Beta Risk of Australian Financial Sector Companies

Frida Lie, Robert Brooks and Robert Faff

Australian Economic Papers, 2000, vol. 39, issue 3, 301-311

Abstract: In this paper we apply the generalised auto‐regressive conditional heteroskedasticity (GARCH) and Kalman Filter approaches to modelling the equity beta risk of a sample of fifteen Australian financial sector companies. A de‐regulated environment in which strong competitive forces are at play typifies the period of investigation. Consistent with the existing literature, we find that these modelling techniques perform well and, in particular, that the Kalman Filter approach is preferred. Further, we find that considerable variability of risk occurs throughout the sample period. Thus, extending the evidence of Harper and Scheit (1992); Brooks and Faff (1995) and Brooks, Faff and McKenzie (1997), we find evidence consistent with the hypothesis that deregulation has impacted the risk of banking sector stocks.

Date: 2000
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