Timeâ€Varying Beta Risk of Australian Industry Portfolios: A Comparison of Modelling Techniques

This paper investigates three techniques for the estimation of conditional timeâ€dependent betas: (a) a multivariate generalised ARCH approach; (b) a timeâ€varying beta market model approach suggested by Schwert and Seguin (1990); and (c) the Kalman filter technique. These approaches are applied to a sample of returns on Australian industry portfolios over the period 1974–1996. The evidence found in this paper, based on inâ€sample forecast errors, overwhelmingly supports the Kalman filter approach When outâ€ofâ€sample forecasts are considered the evidence again finds in favour of the Kalman filter approach.