This study examines the time-varying characteristics of industry betas in an emerging market (namely, India) and a developed market (namely, the United States) to explore whether the observed behaviours of the beta are independent of the extent of financial market development. This study contributes to the literature by relating industry betas to the movements, particularly to the volatility and stresses in the relevant markets. Covering the period from 1999 to 2017, this 18-year study established the need to make time-varying betas, and it uses a suitable multivariate GARCH model to estimate the time-varying betas for different industries in the two markets. The study confirms significant transmission of volatility from the domestic market to the time-varying betas in India and the United States. There seem to be greater investment risks in the emerging market because its industry betas increase with increased volatility of the global market. This is in sharp contrast to a developed country where movements in industry betas are not influenced by the volatilities in the global market. Given that volatilities may not lead to market stress, we construct a stress index following the CMAX method to examine whether market risks increase under stress. The results are significant. While the emerging market betas increase under domestic market stress, the developed market betas avoid all types of market stresses, and in case they fall under stresses, they reduce the market risk of investment. Hence, varying betas over time do not magnify the investment risks. However, investors in emerging markets, such as India, must act judiciously. The non-diversifiable market risks sharply increase when the relevant markets are volatile and, more importantly, under stress.
