Time Varying Estimate of Beta (Systemic Risk): Evidence from Colombo Stock Exchange
International Journal of Accounting & Business Finance, Issue 1, 2015
11 Pages Posted: 3 Sep 2016
Date Written: June 15, 2015
Abstract
This study investigates the time varying behavior of betas (Systematic risk) in Colombo Stock Exchange (CSE). The study used the trading data of 26 stocks listed in Bank Finance & Insurance, Hotels & Travel, and Manufacturing sectors for a period of 9 years for the analysis from 2005 to 2013. This study estimates time varying betas using two different approaches; Recursive regression and Rolling regression. These two different approaches are employed in order to estimate and analyze the time varying betas of 26 stocks under full period and three sub periods as 2005-2007, 2008-2010, and 2011-2013. The empirical finding of this study provides a clear evidence of time varying nature of 26 betas and indicates increasing and decreasing beta trends. It is also found that beta values varied across the techniques used to estimate the betas. Finally, finding suggests that, similar to some other evidences in developed and emerging markets, betas are not stable and demonstrate time varying nature in the CSE. The findings imply that the assumption of beta constancy is not valid in Capital Assets Pricing Model (CAPM) and the users of this model in estimating the systematic risk in CSE will not get the anticipated results.
Keywords: Beta, Capital Assets Pricing Model, Recursive regression, Rolling Regression
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