Mean reversion and the forecasting of country betas: A note

Michael Gangemi, Robert Brooks, Robert Faff

Research output: Contribution to journalArticleResearchpeer-review

4 Citations (Scopus)

Abstract

In 1971 and 1975, M. E. Blume found individual equity betas to have a "regression" tendency toward the grand mean of unity. His original results have been widely accepted to the extent that a literature has developed on the application of Bayesian techniques to beta estimation so as to adjust for mean reversion. The more recent literature has focused on risk estimation and the applicability of asset pricing models in the international finance setting, where the focus has been on the aggregate country level risk. Given the increasing popularity of country beta models, an interesting but, as yet, unexplored issue is whether aggregate country betas display mean reversion tendencies similar to that found for individual company betas. The examination of this issue is the central aim of the current paper. In short, this analysis reveals strong evidence of mean reversion of country betas, similar to that documented in the single country setting in the existing literature.

Original languageEnglish
Pages (from-to)231-245
Number of pages15
JournalGlobal Finance Journal
Volume10
Issue number2
Publication statusPublished - 1 Sep 1999
Externally publishedYes

Keywords

  • Country betas
  • Forecasting
  • Mean reversion

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