A Shifting Regimes Approach to the Stationarity of the Market Model Parameters of Individual Securities

Recent studies indicate that the widespread assumption of parameter stationarity in empirical applications of asset pricing models may be inappropriate. This paper investigates the feasibility of modeling parameter instability as a sequence of persistent stable regimes. Recursive residual and log li...

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Bibliographic Details
Published in:Journal of financial and quantitative analysis 1986-09, Vol.21 (3), p.307-321
Main Authors: Hays, Patrick A., Upton, David E.
Format: Article
Language:English
Subjects:
Bear markets
Capital assets
Investment risk
Linear regression
Mathematical independent variables
Modeling
Mutual funds
Parametric models
Point estimators
Pricing
Quantitative analysis
Regression analysis
Securities analysis
Stability
Stochastic models
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Summary:Recent studies indicate that the widespread assumption of parameter stationarity in empirical applications of asset pricing models may be inappropriate. This paper investigates the feasibility of modeling parameter instability as a sequence of persistent stable regimes. Recursive residual and log likelihood techniques are combined to detect and locate shift points. The results indicate that regime shifts are widespread, frequent, and often large enough to significantly effect empirical findings. The nature of the shifts appears to be a rotation of the regression line, indicating that correction of both alpha and beta parameters is required.
ISSN:0022-1090
1756-6916
DOI:10.2307/2331044