Time-Varying Betas and Cross-Sectional Return-Risk Relation: Evidence from the UK

Posted: 14 Jul 2000

See all articles by Patricia Fraser

Patricia Fraser

Curtin University of Technology - Curtin Business School - Bentley Campus; University of Aberdeen - Business School

Foort Hamelink

Lombard Odier Asset Management (SA); VU University Amsterdam

Martin Hoesli

University of Geneva - Geneva School of Economics and Management (GSEM); Swiss Finance Institute; University of Aberdeen - Business School

Bryan MacGregor

University of Aberdeen - Centre for Property Research

Date Written: 2000

Abstract

The seminal study by Fama and MacBeth (1973) initiated a stream of papers testing for the cross-sectional relation between return and risk. The debate wether beta is a valid measure of risk has been renimated by Fama and French (1992) and subsequent studies. Rather than focusing on exogenous variables that have a larger explanatory power than an asset's beta in cross sectional tests, we assume the matrix of variances-covariances to follow a time varying ARCH process. Using monthly data from the UK market from February 1975 to December 1996, we compare the cross sectional return-risk relations obtained with an unconditional specification for asset's betas to those obtained when the estimated betas are based on an ARCH model. We also investigate the Pettengill, Sundaram and Mathure (1995) approach, which allows a negative cross sectional return-risk relation in periods in which the market portfolio yields a negative return relative to the risk free rate. These tests are also carried out on samples pertaining to a specific month and on samples from which a particular month is removed. Our result suggest that CAPM holds in downward moving markets than in upward moving markets hence beta is a more appropriate measure of risk in bear markets.

JEL Classification: C20, G10

Suggested Citation

Fraser, Patricia and Hamelink, Foort and Hoesli, Martin Edward Ralph and MacGregor, Bryan D., Time-Varying Betas and Cross-Sectional Return-Risk Relation: Evidence from the UK (2000). Available at SSRN: https://ssrn.com/abstract=216929

Patricia Fraser (Contact Author)

Curtin University of Technology - Curtin Business School - Bentley Campus ( email )

GPO Box U1987
Perth WA 6845
Australia

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom

Foort Hamelink

Lombard Odier Asset Management (SA) ( email )

6 avenue des Morgines
Petit-Lancy
Geneva, 1213
Switzerland

HOME PAGE: http://www.hamelink.com

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Martin Edward Ralph Hoesli

University of Geneva - Geneva School of Economics and Management (GSEM) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland
+41 22 379 8122 (Phone)
+41 22 379 8104 (Fax)

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom
+41 22 379 8122 (Phone)
+41 22 379 8104 (Fax)

Bryan D. MacGregor

University of Aberdeen - Centre for Property Research ( email )

Aberdeen AB24 2UF
Scotland
44-1224-272-356 (Phone)
44-1224-273-487 (Fax)

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