Stability of Beta over Market Phases

International Research Journal of Finance and Economics
ISSN 1450-2887 Issue 50 (2010)
© EuroJournals Publishing, Inc. 2010 http://www.eurojournals.com/finance.htm Stability of Beta over Market Phases: An Empirical Study on
Indian Stock Market
Koustubh Kanti Ray
Assistant Professor, Financial Management at Indian Institute of Forest Management (IIFM),
Bhopal, India.
E-mail: [e-mail]
Abstract
The significant role played by beta in diverse aspects of financial decision making has forced people from small investors to investment bankers to rethink on beta in the era of globalization. In the present changing market condition, it is imperative to understand the stability of beta which augments an efficient investment decisions with additional information on beta. This study examined the stability of beta for India market for a ten year period from 1999 to 2009. The monthly return data of 30 selected stocks are considered for examining the stability of beta in different market phases. This stability of beta is tested using three econometric models i.e. using time as a variable, using dummy variables and the Chow test. The results obtained from the three models are mixed and inconclusive. However there are 9 stocks where all the three models reported similar signal of beta instability over the market phases.
Keywords: Stability of Beta, Phase wise beta, Indian Market Beta, Dummy Variable,
Chow Test

1. Introduction
The Capital Asset Pricing Model (CAPM) developed by Sharpe (1964), Lintner (1965) and Mossin
(1966) has been the dominating capital market equilibrium model since its initiation. It continues to be extensively used in practical portfolio management and in academic research. Its essential implication is that the contribution of an asset to the variance of the market portfolio - the asset’s systematic risk, or beta risk - is the proper measure of the asset’s risk and the only systematic determinant of the asset’s
return.

References: Allen R G, Impson C M and Karafiath I (1994), “An Empirical Investigation of Beta Stability: Portfolios vs Alexander, Gordon., J. Sharpe., Chervany, Norman L.(1980) “ On the Estimation and Stability of Beta”, Journal of Financial Quantitative Analysis, Vol.XV, No.1, March, pp Altman, Edward I., Bertrand Jacquillat and Michel Levasseur (1974) “Comparative Analysis of Risk Measures: France and the United States” Journal of Finance, December, pp.1495-1511. Baesel J B (1974), “On the Assessment of Risk: Some Further Considerations”, The Journal of Finance, Vol Bildersee, John S and Robert, Gorden S. (1981) “Beta Instability when Interest Rate Level Changes”, Journal of Financial Quantitative Analysis, September, Vol Blume Marshall E (1971), “On the Assessment of Risk”, Journal of Finance, Vol. 26, No. 1. pp. 1-10 Chawla D (2001), “Testing Stability of Beta in the Indian Stock Market”, Decision, Vol Chen, Son-Nan (1981) : Beta Non-stationarity, Portfolio Residual Risk and Diversification”, Journal of Financial and Quantitative Analysis, March, Vol.XVI, No.1. Chow, Gregory, C. (1960) “Tests of Equality Between Sets of Coefficients in Two Linear Regressions,” Econometrica, vol Fabozzi, F. J. and Francis, J. C. (1977) Stability tests for alphas and betas over bull and bear market conditions, Journal of Finance, 32, 1093–9. Fama E. F., French K. R., 1992, The cross-section of expected stock returns, Journal of Finance 47, 427-465. Fama E. F., French K. R., 1996, The CAPM is wanted, dead or alive, Journal of Finance 51, 1947-1958. French, D., J. Groth, and J. Kolari, 1983, Current Investor Expectations and Better Betas, Journal of Portfolio Management, 12-17. Gujarati, Damodar N. (2004) Basic Econometrics, Fourth Edition The McGraw−Hill Companies, pp-273-278. Gupta, O. p. AND Sehgal, Sanjay (1999) “Relationship between Accounting Variables and Systematic Risk: The Indian Experience”, Indian Accounting Review, June, Vol.3, No.1. Haddad M M (2007), “An Intertemporal Test of the Beta Stationarity: The Case of Egypt”, Middle East Business and Economic Review, Vol Jegadeesh N, 1992, Does market risk really explain the size effect?, Journal of Financial and Quantitative Analysis 27, 337-351. Jagannathan, Ravi and Zhenyu Wang, “The Conditional CAPM and the Cross-Section of Expected Returns.” Journal of Finance 51, 3-53, (1996). Knight F H (1921), Risk, Uncertainty and Profit, Houghton Mifflin Company: Chicago, Part 1, Chapter 1, Paragraph 26. Levitz Gerald D (1974), “Market Risk and the Management of Institutional Equity Portfolios”, Financial Analysts Journal, Vol Levine, David, M., David Stephen., Timothy C. Krehbiel and Mark L. Berenson (2006) Statistics for Managers, Printice-Hall India, 4th Edition, pp-599-600. Levy Robert A (1971), “Stationarity of Beta Coefficients”, Financial Analysts Journal, Vol. 27, No Lewellen, J. and Nagel, S. (2003) The conditional CAPM does not explain asset-pricing anomalies, MIT Sloan Working Paper No Lintner, John. 1965. "Security Prices, Risk, and Maximal Gains from Diversification." Journal of Finance, V 184 International Research Journal of Finance and Economics - Issue 50 (2010) Mossin, Jan. (1966) "Equilibrium in a Capital Asset Market." Econometrica, V. 34, No. 2: pp 768-83. Porter, R. Burr and John R. Ezell (1975) “A Note on the Predictive ability of Beta Coefficients”, Journal of Business Research, Vol Rosenberg and Marathe V (1979), “Tests of Capital Asset Pricing Hypotheses”, Research in Finance, Vol Schwert G W and Sequin P J (1990), “Heteroscedasticity in Stock Returns”, Journal of Finance, Vol Scott, Elton and Brown, Stewart (1980) “Biased Estimators and Unstable Betas”, The Journal of Finance, March, Vol Sharpe W F (1963), “A Simplified Model for Portfolio Analysis” Management Science”, Vol. Sharpe, William F. 1964. "Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk." Journal of Finance, V Siegel, A., (1995) “Measuring Systematic Risk Using Implicit Beta”, Management Science, 41,