Time-varying betas and the cross-sectional return-risk relation: evidence from the UK

Patricia Fraser, Foort Hamelink, Martin Hoesli and Bryan Macgregor

The European Journal of Finance, 2004, vol. 10, issue 4, 255-276

Abstract: The seminal study by Fama and MacBeth in 1973 initiated a stream of papers testing for the cross-sectional relation between return and risk. The debate as to whether beta is a valid measure of risk was reanimated by Fama and French and subsequent studies. Rather than focusing on exogenous variables that have a larger explanatory power than an asset's beta in cross-sectional tests, the matrix of variances-covariances is assumed to follow a time varying ARCH process. Using monthly data from the UK market from February 1975 to December 1996, the cross-sectional return-risk relations obtained with an unconditional specification for assets' betas are compared to those obtained when the estimated betas are based on an ARCH model. The approach taken by Pettengill, Sundaram and Mathur, which allows a negative cross sectional return-risk relation in periods in which the market portfolio yields a negative return relative to the risk free rate, was also investigated. These tests are also carried out on samples pertaining to a specific month and on samples from which a particular month is removed. Results suggest that the CAPM holds better in downward moving markets than in upward moving markets hence beta is a more appropriate measure of risk in bear markets.

Keywords: CAPM; QTARCH; return-risk relation; UK market (search for similar items in EconPapers)
Date: 2004
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/13518470110053407 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Time-Varying Betas and Cross-Sectional Return-Risk Relation: Evidence from the UK (2000)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:eurjfi:v:10:y:2004:i:4:p:255-276

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/REJF20

DOI: 10.1080/13518470110053407

Access Statistics for this article

The European Journal of Finance is currently edited by Chris Adcock

More articles in The European Journal of Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().