A Selectivity Corrected Time Varying Beta Estimator

38 Pages Posted: 23 Feb 2006

See all articles by Robert D. Brooks

Robert D. Brooks

Monash University; Financial Research Network (FIRN)

Jonathan Dark

Monash University

Robert W. Faff

University of Queensland

Tim Fry

RMIT University - School of Economics, Finance and Marketing

Date Written: February 20, 2006

Abstract

This paper explores two issues in beta estimation, specifically, time variation and thin trading. In a multivariate GARCH approach, the paper conducts an analysis of the importance of assumptions made about the correlation structure in the multivariate GARCH model. The results of Monte Carlo analysis and an empirical application to Australian stock data demonstrate that it is better to allow for time variation in the correlation structure. The paper then develops a selectivity corrected time varying beta estimator. The results of a Monte Carlo experiment show that the new estimator performs well in handling the censoring in the data. Further, when the model is applied to individual stock data for Australia it provides a model that captures the impacts of censoring and thin trading on time varying beta risk.

Keywords: Time varying betas, GARCH, Censoring, Thin trading, Sample selectivity model

JEL Classification: G12, C24

Suggested Citation

Brooks, Robert Darren and Dark, Jonathan and Faff, Robert W. and Fry, Tim, A Selectivity Corrected Time Varying Beta Estimator (February 20, 2006). Available at SSRN: https://ssrn.com/abstract=885800 or http://dx.doi.org/10.2139/ssrn.885800

Robert Darren Brooks (Contact Author)

Monash University ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Jonathan Dark

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Tim Fry

RMIT University - School of Economics, Finance and Marketing ( email )

445 Swanston Street
Melbourne, Victoria 3000
Australia

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