Estimating and Testing for Time-Varying stock market betas in Europe

This work analyzes the comovements between different domestic European stock market returns (Spain, France, Germany, Switzerland and United Kingdom) and the Eurostock and also the comovements between the Spanish index (IBEX) and the rest, not explained by the Eurostock. To do that, we estimate nonparametric betas to measure the possibly time-varying sensitivity of each country stock market to the European market returns. Accounting for the nonparametric specification, we propose a formal test for the constancy of these comovements, as a two-step procedure. A simulation study is presented to ensure the good performance. For the European data, the estimated betas show different patterns for different countries. On the one hand, when the test is applied to the relation between each domestic index and the Eurostock, all betas are significant and time-varying. On the other hand, we find that the IBEX has remaining time-varying comovements with the German and French index returns, not explained by the Eurostock, but not with the Swiss index. The relation with the UK index return disappears once the Eurostock effect is removed.