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

Sascha Mergner () and Jan Bulla
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Jan Bulla: Georg-August-University, Goettingen

Finance from University Library of Munich, Germany

Abstract: This paper investigates the time-varying behavior of systematic risk for eighteen pan-European sectors. Using weekly data over the period 1987- 2005, four 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, a bivariate stochastic volatility model estimated via the efficient Monte Carlo likelihood technique as well as two Markov switching models. 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. Remarkably, the Markov switching models yield a worse out-of-sample performance than standard OLS.

Keywords: Markov switching; Kalman filter; stochastic volatility; efficient Monte Carlo likelihood; bivariate t-GARCH; European industry portfolios; time-varying beta risk (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-cfn, nep-eec, nep-ets, nep-fin, nep-fmk and nep-for
Date: 2005-10-26
Note: Type of Document - pdf; pages: 44. Extension of an earlier paper by the first author ('Time-varying beta risk of pan-European sectors') that adds two Markov switching models to the analysis.
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Journal Article: Time-varying beta risk of Pan-European industry portfolios: A comparison of alternative modeling techniques (2008) Downloads
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