Stability Tests for Alphas and Betas Over Bull and Bear Market Conditions
JOURNAL OF FINANCE, 1977 September, XXXII(4), 1093-1099.
8 Pages Posted: 31 Mar 2015 Last revised: 12 Apr 2019
Date Written: September 28, 1977
Monthly returns are used to estimate the single-index market model (SIMM). Binary variables are used to determine if the alpha intercept and beta slope coefficients are stable through alternating bull markets and bear markets. The results suggest that some investment analysts have fallen into the trap of misapplying econometric models and, as a result, are purveying erroneous information. Neither the alpha nor the beta statistics in the SIMM appear to be significantly affected by the alternating forces of bull and bear markets. Of course, the SIMM, the alpha, the beta and the statistics from all econometric models change from sample to sample. But, the question addressed here was whether or not these normal sampling errors were more than would occur in the classic stability tests. Such instability would tend to depreciate the value of the received risk-return theories. However, the SIMM was found to be unaffected by the three different bull and bear market conditions which were delineated.
Keywords: single-index market model, alpha, beta, bull and bear markets, binary variables
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