Monitoring the Parameters of the Market Model by Linear Profile Procedures

Abstract The method to measure the market risk (which stocks are exposed) by the slope coefficient of a linear regression model (that relates the returns of the asset and the returns of a market index) is known as Market Model. When applying this method it is extremely important to check the stability of the parameters (the slope, the intercept and the variance) over the time to neutralize the market risk. Procedures known in statistical quality control as analysis of linear profiles are presented for such purpose. By statistical tests based on the F -statistics, it is possible to identify the sources of variation and also out-of-control samples. Numerical examples illustrate the proposed procedures.