The Stochastic Structure of the Time-Varying Beta: Evidence from UK Companies.

The stochastic structure of time-varying betas from 15 companies in the UK is investigated. Time-varying betas are estimated by means of the bivariate MA-GARCH model. The stochastic structure is investigated by means of two fractional integration tests, the Geweke and Porter-Hudak and the Robinson tests, and a structural-break-oriented unit root test. Results show that time-varying betas are mean-reverting but only few have a long memory and thus are mean-reverting at a slow rate. This result is further backed by the structural break unit root test. These results contradict earlier studies, which fail to find a stationary beta. Stationary betas may imply that stock returns may be forecast in the long run. Copyright 2002 by Blackwell Publishers Ltd and The Victoria University of Manchester