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

Published online by Cambridge University Press:  06 April 2009

Patrick A. Hays  and
David E. Upton
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Abstract

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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 21 , Issue 3 , September 1986 , pp. 307 - 321
Copyright
Copyright © School of Business Administration, University of Washington 1986

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