Estimating short term systematic risk of stock: realized betas vs. Kalmans filters
We have tested two methods for forecasting short-term betas of the stocks: a state-space modeling and autoregressive models for realized betas. The out-of-the-sample forecast accuracy for the both method is not very good, what can be due to high level of noise in the data. In the paper we tiy to forecast daily betas. When forecasting quarterly betas, the accuracy is approximately two times better. However for investors interested in short-period trading the usefulness of such a long-time betas is much worse. The accuracy of the both method for forecasting is comparable. However the method based on realized betas is numerically simpler and less time-consuming than the method using Kalman filtering. This makes the former method more preferable. (fragment tekstu)
- Andersen T.G., Bollerslev T., Diebold F.X., Wu G., A Framework for Exploring the Macroeconomic Determinants of Systematic Risk, "American Economic Review" 2005, No. 95, pp. 398-404.
- Andersen T.G., Bollerslev T., Diebold F.X., Wu G., 2006, Realized Beta: Persistence and Predictability, in: Fomby T. (eds.), Advances in Econometrics: Econometric Analysis of Economic and Financial Time Series in Honor of R.F. Engle and C.W.J. Granger, Emerald Group Publishing, pp. 1-40.
- Barndorff-Nielsen O.E., Shephard N., Econometric analysis of realized covariation: high frequency based covariance, regression and correlation in financial economics, "Econometrica" 2004, No. 72, pp. 885-925.
- Basu D., Stremme A., 2007, CAPM and Time-Varying Beta: The Cross-Section of Expected Returns, working paper in Social Science Research Network (SSRN), 2007.
- Bollerslev T., Modeling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model, "Review of Economics and Statistics" 1990, No. 72, pp. 498-505.
- Bollerslev T., Zhang B.Y.B., Measuring and modeling systematic risk factor pricing models using high-frequency data, "Journal of Empirical Finance" 2003, No. 10, pp. 533-558.
- Chen B., Reeves J.J., Dynamic Asset Beta Measurement, working paper in Social Science Research Network (SSRN), 2009.
- Collins D.W., Ledolter J., Rayburn J., Some Further Evidence on the Stochastic Properties of Systematic Risk, "Journal of Business" 1987, No. 60, pp. 425-448.
- Fabozzi F.J., Francis J.S., Beta As A Random Coefficient, "Journal of Financial and Quantitative Analysis" 1978, No. 13.
- Faff R.W., Hillier D., Hillier J., Time Varying Beta Risk: An Analysis of Alternative Modelling Techniques, "Journal of Business Finance & Accounting" 2000, No. 27.
- Gonzales-Rivera G., The Pricing of Time-Varying Beta, "Empirical Economics" 1997, No. 22.
- Li X., On Unstable Beta Risk And Its Modelling Techniques For New Zealand Industry Portfolios, Working paper at Massey University Commerce, Auckland, 2003.
- Liu Q., On Portfolio Optimization: How and When do We Benefit From High- Frequency Data, "Journal of Applied Econometrics" 2009, No. 24.
- Markowitz H.M., Portfolio Selection, "Journal of Finance" 1952, No. 7.
- Mergner S., Time-varying Beta Risk of Pan-European Sectors: A Comparison of Alternative Modeling Techniques, Working paper at Social Science Research Network (SSRN), 2005.
- Protter P.E., Stochastic Integration and Differential Equations, Springer, 2005.
- Reeves J.J., Wu H., Constant vs. Time-Varying Beta Models: Further Forecast Evaluation, Working paper at Social Science Research Network (SSRN), 2010.
- Sharpe W.F., A simplified model for portfolio analysis, "Management Science" 1963.
- Sharpe W.F., Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk, "Journal of Finance" 1964, No. 19.
- Shiryaev A.N., Essentials of Stochastic Finance, World Scientific, 1999.
- Sunder S., Stationarity of Market Risk: Random Coefficients Tests For Individual Stocks, "Journal of Finance" 1980, No. 35.