Title

Conditional Risk-Return Relationship in a Time-Varying Beta Model

Document Type

Article

Publication Date

6-1-2008

Department

School of Business

Abstract

We investigate the asymmetric risk-return relationship in a time-varying beta CAPM. A state space model is established and estimated by the Adaptive Least Squares with Kalman foundations proposed by McCulloch. Using S&P 500 daily data from 1987:11-2003:12, we find a positive risk-return relationship in the up market (positive market excess returns) and a negative relationship in the down market (negative market excess returns). This supports the argument of Pettengill et al., who use a constant beta model. However, our model outperforms theirs by eliminating the unexplained returns and improving the accuracy of the estimated risk price. © 2008 Taylor & Francis.

DOI

10.1080/14697680701191361

First Page

381

Last Page

390

Volume

8

Issue

4

ISSN

14697688

Comments

At the time of publication, Peng Huang was affiliated with University of Wisconsin-La Crosse.

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