Time-varying beta risk of Pan-European industry portfolios: A comparison of alternative modeling techniques |
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Authors: | Sascha Mergner Jan Bulla |
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Affiliation: | 1. Institut für Statistik und ?konometrie, Georg-August-Universit?t G?ttingen , G?ttingen, Germany sasha.mergner@gmx.de;3. School of Mathematics, Statistics and Computer Science, Victoria University of Wellington , Wellington, New Zealand |
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Abstract: | This paper investigates the time-varying behavior of systematic risk for 18 pan-European sectors. Using weekly data over the period 1987–2005, six different modeling techniques in addition to the standard constant coefficient model are employed: a bivariate t-GARCH(1,1) model, two Kalman filter (KF)-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 ex-ante forecast performances of the different models indicate that the random walk process in connection with the KF is the preferred model to describe and forecast the time-varying behavior of sector betas in a European context. |
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Keywords: | time-varying beta risk Kalman filter bivariate t-GARCH stochastic volatility efficient Monte Carlo likelihood Markov switching European industry portfolios |
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