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SEQUENTIAL TESTING FOR THE STABILITY OF HIGH-FREQUENCY PORTFOLIO BETAS

Published online by Cambridge University Press:  28 November 2011

Alexander Aue ,
Siegfried Hörmann ,
Lajos Horváth ,
Marie Hušková  and
Josef G. Steinebach
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Abstract

Despite substantial criticism, variants of the capital asset pricing model (CAPM) remain to this day the primary statistical tools for portfolio managers to assess the performance of financial assets. In the CAPM, the risk of an asset is expressed through its correlation with the market, widely known as the beta. There is now a general consensus among economists that these portfolio betas are time-varying and that, consequently, any appropriate analysis has to take this variability into account. Recent advances in data acquisition and processing techniques have led to an increased research output concerning high-frequency models. Within this framework, we introduce here a modified functional CAPM and sequential monitoring procedures to test for the constancy of the portfolio betas. As our main results we derive the large-sample properties of these monitoring procedures. In a simulation study and an application to S&P 100 data we show that our method performs well in finite samples.

Type
Research Article
Information
Econometric Theory , Volume 28 , Issue 4 , August 2012 , pp. 804 - 837
Copyright
Copyright © Cambridge University Press 2011

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Footnotes

We thank Oliver Linton and three anonymous referees for their constructive comments. This research was partially supported by NSF grant DMS 0905400, grant GACR 201/09/J006, grant MSM 0021620839, Banque nationale de Belgique and Communauté française de Belgique—Actions de Recherche Concertées (2010–2015), DFG grant STE 306/22-1.

References

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