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SEQUENTIAL TESTING FOR THE STABILITY OF HIGH-FREQUENCY PORTFOLIOBETAS

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

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

Information

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

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.

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