GROUP EFFECTS AND BETA NONSTATIONARITY |
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| Authors: | Son-Nan Chen Arthur J. Keown |
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| Affiliation: | The authors are respectively, Associate Professor of Finance at the University of Maryland, and Professor of Finance at Virginia Polytechnic Institute and State University. |
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| Abstract: | Recent evidence indicates that while random diversification can lead to the elimination of the majority of systematic risk, the systematic selection of securities can result in significant group effects blocking this dissipation of unsystematic risk. The group effects associated with investment in growth, cyclical, stable and oil stocks found by Farrell and Martin and Klemkosky were reexamined while allowing for beta nonstationarity. It was found that the beta nonstationarity effect, while quite large for individual stocks and small portfolios tended diversify away quite quickly. It was further found that much of what has in the past been termed a group effect is actually the result of beta nonstationarity. |
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