The Kalman filter approach for time-varying β estimation

Authors:
Massimo Gastaldi;Annamaria Nardecchia
Affiliations:
Department of Electrical Engineering, University of L'Aquila, Monteluco di Roio, 67100 L'Aquila, Italy;Department of Electrical Engineering, University of L'Aquila, Monteluco di Roio, 67100 L'Aquila, Italy
Venue:
Systems Analysis Modelling Simulation
Year:
2003

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Abstract

Beta parameter is used in finance in the form of market model to estimate systematic risk. Such βs are assumed to be time invariant. Literature shows that now there is a considerable evidence that β risk is not constant over time. The aim of this article is the estimation of time-varying Italian industry parameter βs using the Kalman filter technique. This approach is applied to returns of the Italian market over the period 1991-2001.