Forecasting Stock Betas: Application to Australia

Abstract:     
The purpose of this paper is to demonstrate the forecastability of beta, within the context of the Australian stock market. We verify that beta is time varying and apply standard time series analysis following Andersen, Bollerslev, Diebold and Wu (2005a and 2005b). An out-of-sample forecasting exercise is conducted and it is shown that an autoregressive model with three or four lags and estimation based on the previous 80 quarters produces an overwhelming improvement over the benchmark constant beta model.

Keywords: Realized Betas, Australian Stock Exchange, Autoregressive Model

JEL Classifications: G0

Working Paper Series