302 Int. J. Monetary Economics and Finance, Vol. 6, No. 4, 2013 Copyright © 2013 Inderscience Enterprises Ltd. A Euro area stock market model with betas dependent on the financial markets cycle José Soares da Fonseca Faculty of Economics, University of Coimbra, Av. Dias da Silva 165, 3004-512 Coimbra, Portugal Fax: +351239790554 E-mail: jfonseca@fe.uc.pt Abstract: This paper estimates market models for the Euro area stock markets of France, Germany, Holland, Italy and Spain, with beta parameters dependent on the financial cycle phases. These models support the calculation of time-varying Treynor ratios, which compare the performance of these domestic markets across different phases of the financial cycle in the Euro area stock markets. Keywords: Euro area stock market model; financial markets cycle; time- varying beta parameters; Treynor ratios. Reference to this paper should be made as follows: da Fonseca, J.S. (2013) ‘A Euro area stock market model with betas dependent on the financial markets cycle’, Int. J. Monetary Economics and Finance, Vol. 6, No. 4, pp.302–308. Biographical notes: José Soares da Fonseca received his PhD in Economics from the University of Orleans, France. He is a Professor of Finance and Monetary Economics at the University of Coimbra Portugal. His research interests include financial markets integration, funds performance evaluation, bond portfolio management and interest rate risk measures. 1 Introduction The empirical analysis of this paper estimates market models for the biggest Euro area stock markets such as France, Germany, Holland, Italy and Spain. The beta parameters estimated by these models are time-varying and depend on variables that provide information on stock market phases. Treynor and Mazuy (1966) proposed the first solution in the literature to beta coefficients variability, according to which betas vary with market portfolio’s excess return (market timing effect). Another explanation of betas variability was given by Beaven et al. (1970) who enhanced the influence of firm variables as payout, leverage, size, etc., on beta values. The influence of macroeconomic variables was taken into consideration by Rosenberg and Guy (1976), according to whom beta changes are caused by underlying economic events, namely changes in the expected rate of inflation, interest rates and growth rate of real gross domestic product (GDP). The importance of beta variability to portfolio management was put in evidence by