The Stability of Factor Sensitivities of German Stock Market Sector Indices: Empirical Evidence and Some Thoughts about Practical Implications
Christoph Wegener () and
Tobias Basse ()
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Christoph Wegener: Department for Economics, Leuphana Universität Lüneburg, 21335 Lüneburg, Germany
Tobias Basse: NORD/LB, 30159 Hannover, Germany
Journal of Risk and Financial Management, 2019, vol. 12, issue 3, 1-10
This empirical study estimates 18 single and 18 three-factor models and then tests for structural change. Break dates are identified where possible. In general, there is some empirical evidence for parameter instabilities of the estimated beta coefficients. In most cases there is no or one break point, and in some cases, there are two structural breaks examining the three factor models. The estimated factor sensitivities of single beta models seem to be even less strongly affected by structural change. Consequently, beta factors are probably more stable than some observers might believe. The break dates that have been identified generally seem to coincide with crises or recoveries after stock market slumps. This empirical finding is compatible with the point of view that bull-markets or bear-markets could matter when estimating beta coefficients. In general, the timing of structural change often seems to coincide with either the bursting of the dot-com bubble or the recovery of stock prices thereafter. The banking industry is the most notable exception. In this sector of the German economy, the global financial meltdown and the sovereign debt crisis in Europe have been of high relevance. Consequently, the internet hype of the late 1990s and the early 2000s seems to be more important for the German stock market than the US subprime debacle and the accompanying European sovereign debt crisis.
Keywords: factor models; parameter stability; stock market; sector indices (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jjrfmx:v:12:y:2019:i:3:p:140-:d:262212
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