Time-Varying Beta Risk of Australian Industry Portfolios: A Comparison of Modelling Techniques

This paper mvestigates three techniques for the estimation of conditional llme-dependent betas: (a) a multivariate generalised ARCH approach; (b) a tlme-varymg 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 in-sample forecast errors, overwhelmingly supports the Kalman filter approach When out-of-sample forecasts are considered the evidence again finds in favour of the Kalman filter approach. Keywords