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Time-Varying Beta Risk of Australian Industry Portfolios: A Comparison of Modelling Techniques
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Robert D. Brooks, Robert W. Faff and Michael D. McKenzie
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Abstract
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This paper investigates three techniques for the estimation of conditional time-dependent
betas; (a) a multivariate generalised ARCH approach; (b) a time-varying beta market model
approach suggested by Schwert and Seguin (1990); and (c) the Kalman filter technique.
These approaches are applied to a sample of returns on Australian industry portfolios
over the period 1974-1996. The evidence found in this paper, based on in-sample
forecast errors, overwhelmingly supports the Kalman filter approach. When out-of-sample
forecasts are considered the evidence again finds in favour of the Kalman filter approach.
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Download this article.
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Keywords
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TIME-VARYING BETA; GARCH; KALMAN FILTER.
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Contact Details
Michael D. McKenzie
Department of Economics and Finance
Royal Melbourne Institute of Technology
GPO Box 2476V
Melbourne VIC 3001
E-mail: michaelm@bf.rmit.edu.au
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The authors are grateful for the very helpful comments of an anonymous referee.
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