TY - JOUR

T1 - The Stability of Factor Sensitivities of German Stock Market Sector Indices

T2 - Empirical Evidence and Some Thoughts about Practical Implications

AU - Wegener, Christoph

AU - Basse, Tobias

N1 - Publisher Copyright: © 2019 by the authors.

PY - 2019/9

Y1 - 2019/9

N2 - This empirical study estimates 18 single and 18 three-factor models and then tests for structural change. Break dates are identified where possible. In general, there is some empirical evidence for parameter instabilities of the estimated beta coefficients. In most cases there is no or one break point, and in some cases, there are two structural breaks examining the three factor models. The estimated factor sensitivities of single beta models seem to be even less strongly affected by structural change. Consequently, beta factors are probably more stable than some observers might believe. The break dates that have been identified generally seem to coincide with crises or recoveries after stock market slumps. This empirical finding is compatible with the point of view that bull-markets or bear-markets could matter when estimating beta coefficients. In general, the timing of structural change often seems to coincide with either the bursting of the dot-com bubble or the recovery of stock prices thereafter. The banking industry is the most notable exception. In this sector of the German economy, the global financial meltdown and the sovereign debt crisis in Europe have been of high relevance. Consequently, the internet hype of the late 1990s and the early 2000s seems to be more important for the German stock market than the US subprime debacle and the accompanying European sovereign debt crisis.

AB - This empirical study estimates 18 single and 18 three-factor models and then tests for structural change. Break dates are identified where possible. In general, there is some empirical evidence for parameter instabilities of the estimated beta coefficients. In most cases there is no or one break point, and in some cases, there are two structural breaks examining the three factor models. The estimated factor sensitivities of single beta models seem to be even less strongly affected by structural change. Consequently, beta factors are probably more stable than some observers might believe. The break dates that have been identified generally seem to coincide with crises or recoveries after stock market slumps. This empirical finding is compatible with the point of view that bull-markets or bear-markets could matter when estimating beta coefficients. In general, the timing of structural change often seems to coincide with either the bursting of the dot-com bubble or the recovery of stock prices thereafter. The banking industry is the most notable exception. In this sector of the German economy, the global financial meltdown and the sovereign debt crisis in Europe have been of high relevance. Consequently, the internet hype of the late 1990s and the early 2000s seems to be more important for the German stock market than the US subprime debacle and the accompanying European sovereign debt crisis.

KW - Economics

KW - factor models

KW - parameter stability

KW - stock market

KW - sector indices

UR - https://www.mendeley.com/catalogue/e18a1baa-1d77-3a73-ba9b-b444e02569f9/

UR - http://www.scopus.com/inward/record.url?scp=85126790622&partnerID=8YFLogxK

U2 - 10.3390/jrfm12030140

DO - 10.3390/jrfm12030140

M3 - Journal articles

VL - 12

JO - JOURNAL OF RISK AND FINANCIAL MANAGEMENT

JF - JOURNAL OF RISK AND FINANCIAL MANAGEMENT

SN - 1911-8066

IS - 3

M1 - 140

ER -