Beta stability and monthly seasonal effects: evidence from the Australian capital market

Abstract

A number of studies exist across a range of equity markets showing that a significant proportion of stocks in those markets have betas that vary over time. A research challenge posed by this body of evidence is to identify the factors that explain this time variation in individual stock betas. There is also an extensive literature reporting the existence of strong monthly seasonal patterns in equity returns from many markets and across extraordinarily lengthy time periods. Accordingly, using monthly Australian equity returns data, this paper investigates whether seasonal regularities such as the January effect can provide an explanation of beta variation. A key finding of this paper is that taking account of the January monthly seasonal and other monthly seasonals has no effect on the beta stability characteristics of individual stocks. Hence, based on our analysis, seasonal effects does not provide an explanation of beta instability. A subsiduary finding is that stocks with significant monthly seasonal effects tend to have a smaller average market capitalization.