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The extent of nonstationarity of beta

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Abstract

This paper investigates the extent of nonstationarity of beta across the firm size and the beta magnitude by suggesting the sequential parameter stationarity model and estimating change-points of betas. The high-beta firm has shorter stationary interval, which means that its beta changes more frequently than do the low-beta firm's. The firm size, however, does not have a monotonic relation with the length of stationary interval. The small and large firms have relatively shorter stationary interval than do the mid-sized firms. The average length of stationary interval is estimated about five years (exactly 54.19 months). This fact could support the currently widely-used arbitrary 5-year assumption of beta stationarity. The fluctuation of the large firm's beta is more severe than the small firm's, and the high- and low-beta firms have the relatively greater fluctuating betas than do the mid-beta firms. The frequency of detected change-points is found to be positively related to market returns. When the market return is high, the systematic risk changes more frequently, and vice versa.

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Authors and Affiliations

  1. Department of Finance, School of Business, Rutgers University, 08903, New Brunswick, NJ

    Dongcheol Kim

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  1. Dongcheol Kim
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Kim, D. The extent of nonstationarity of beta. Rev Quant Finan Acc 3, 241–254 (1993). https://doi.org/10.1007/BF02407008

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  • DOI: https://doi.org/10.1007/BF02407008

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