Parameter Stability - 1

My previous post (IBM vs the Fama French market factor) showed the results of a regression of 426 months of IBM returns against the Fama French market factor. I was working out the details of getting the data and using Mathematica to do the regression. Now let's take a closer look at that data. Let's look at the stability of IBM's exposure to the Fama French market factor. The image below shows a plot of 366 rolling 60-month factor betas, and the corresponding r-squares. Not very stable! However, notice the discontinuities in the r-square plot (enclosed by two red boxes). This strongly suggest that data outliers are causing problems. My next step will be to define procedures to identify and deal with outliers.

Look how little Mathematica code it took to do this work (Click on the image below to see the details). I like Mathematica more every day.