The Bayesian Method in Estimating Polish and German Industry Betas. A Comparative Analysis of the Risk between the Main Economic Sectors from 2001–2020

Abstract

This paper examines the long‑term dependence between the Polish and German stock markets in terms of industry beta risk estimates according to the Capital Asset Pricing Model (CAPM). The main objective of this research is to compare the Polish and German beta parameters of five Polish and three German sector indices using the Bayesian methodology in the period 2001–2020. The study has two detailed aims. First, to develop a modified, Bayesian approach (SBETA model) that generates significantly more precise beta than the traditional model. Second, to compare the results of different time‑varying industry betas in the Polish and German economies, giving a simple investment recommendation, i.e., which sector could be classified as aggressive or defensive. The betas were time‑varying in both markets but less persistent in the German industries, which seems characteristic of an advanced economy. The Banking sector betas were the highest in both markets, implying the aggressive nature of that industry in the last twenty years. For the Polish market industry, the betas of Construction, IT, Food and Drinks, and Telecom were classified as defensive. For the German economy, the Technologies (IT) sector was also classified as aggressive, but Telecom was defensive. The results give a valuable insight into the systematic risk levels in Poland and Germany, reflecting the investors' learning process and indicating that Polish Banking and German technologies outperformed the market in the last twenty years.