Time-Varying Beta Modelling of Sector Portfolios in the Spanish Market

Abstract

Sector investment has grown significantly in international stock markets an also in the Spanish one, during the last few years. Among other issues, sector portfolio managers need to estimate accurately the beta of their portfolios in order to carry out more efficient investment strategies. Against this background, this paper analyses the dynamic behaviour of sector portfolio’s betas in the Spanish market. Due to previous findings in this market, we propose some extensions of the market model in a state space specification that will allow us to test several hypotheses about the stochastic dynamic process followed by the sector portfolio’s betas. Given that we use daily market data, the state-space market model observation equation’s disturbances are assumed to be conditional heteroskedastic, an aspect that has been scarce considered in the previous literature. Finally, we propose a comparative study about the predictive behaviour of the estimated models, an issue that it is still missing in this market.

Note: Downloadable paper is in Spanish.

Keywords: Sector investment, Spanish stock market, Time-varying betas, State-space models, GARCH

JEL Classification: G11, G15, G32, C01