A beta regression model was proposed in which the coefficients follow a general class of stationary stochastic processes. The procedure identified the processes and estimated the parameters of the model simultaneously from the information in the return series. The returns of each of the Dow Jones 30 securities were analyzed over 60-month estimation periods. The betas of 5 of the securities were nonstationary and did not seem to follow a particular form of nonstationarity. The conclusions of many earlier analyses may be suspect because they were based on procedures tailored to the adoption of a specific form of beta nonstationarity. Therefore, they were based on an erroneous a priori assumption regarding such form. The ordinary least squares model also was found to be quite robust, providing reliable beta and intercept estimates not materially different from the more complex procedure with 25 of the return series.
Full text: The Financial Review, May 1989
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