Modeling time-varying beta in a sustainable stock market with a three-regime threshold GARCH model

Fredj Jawadi, Wael Louhichi, Abdoulkarim Idi Cheffou and Hachmi Ben Ameur ()
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Wael Louhichi: ESSCA School of Management
Abdoulkarim Idi Cheffou: EDC Paris Business School
Hachmi Ben Ameur: INSEEC Business School

Annals of Operations Research, 2019, vol. 281, issue 1, No 13, 275-295

Abstract: Abstract This study revisits an important issue in financial theory: the instability of market beta. To this end, we demonstrate that the linear constant risk model is misleading and does not reproduce changes in beta correctly. We develop a new nonlinear market model to capture beta instability over time for three main states: bear, normal, and bull markets. Our model endogenously identifies these states and their thresholds. We then apply this econometric specification to four major sustainable stock indexes in the US, Europe, Asia, and the World for 2004–2015. The results provide three main findings. First, the market beta is time-varying and changes asymmetrically and nonlinearly, suggesting that the systematic risk statistically differs between market regimes for the US, Europe, and the World. Second, the positive sign of beta in the bull market for these three regions suggests that systematic risk increases as economic conditions improve. Third, the lowest level of beta in the bear market indicates the usefulness of the sustainable stock index to hedge and cover investors’ portfolios against risk, particularly in a bear market.

Keywords: Time-varying market beta; Bull and bear markets; Instability; Sustainable index nonlinearity (search for similar items in EconPapers)
JEL-codes: C20 G15 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10479-018-2793-3

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