Nonparametric Dynamic Conditional Beta

Maheu, John M and Shamsi, Azam (2016): Nonparametric Dynamic Conditional Beta.

Abstract

This paper derives a dynamic conditional beta representation using a Bayesian semiparametric multivariate GARCH model. The conditional joint distribution of excess stock returns and market excess returns are modeled as a countably infinite mixture of normals. This allows for deviations from the elliptic family of distributions. Empirically we find the time-varying beta of a stock nonlinearly depends on the contemporaneous value of excess market returns. In highly volatile markets, beta is almost constant, while in stable markets, the beta coefficient can depend asymmetrically on the market excess return. The model is extended to allow nonlinear dependence in Fama-French factors.

• Item Type: MPRA Paper
• Language: English
• Keywords: GARCH, Dirichlet process mixture, slice sampling
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; G - Financial Economics > G1 - General Financial Markets > G10 - General; G - Financial Economics > G1 - General Financial Markets > G17 - Financial Forecasting and Simulation

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