Tests of the CAPM with structural instability and asymmetry
This study takes into account two important features found in most time series, namely, nonlinearity and structural instability, in the test of the Sharpe--Lintner CAPM. Using data on BM- and size-sorted quintile portfolios, we implement the multiple structural change approach of Bai and Perron (2003) and have the following interesting findings. First, there is overwhelming evidences in support of at least one break in betas for all the portfolios under investigation. Second, in most but not all cases, there exist asymmetries in betas, indicating that the risk measures can be different depending on the market conditions. Finally, in contrast to the findings that all the testing results by single regressions cannot reject the CAPM, we find that the CAPM can be consistent with the data in some regimes but may appear to be inconsistent with the data in some other regimes once the possibility of simultaneous nonlinearity and parameter instability are taken into account. This particularly appealing feature has been completely ruled out under the conventional single-equation framework.
Year of publication: |
2005
|
---|---|
Authors: | Ho-Chuan (River) Huang ; Wu, Pei-Shan |
Published in: |
Applied Financial Economics Letters. - Taylor and Francis Journals, ISSN 1744-6546. - Vol. 1.2005, 5, p. 321-327
|
Publisher: |
Taylor and Francis Journals |
Saved in:
freely available
Saved in favorites
Similar items by person
-
The asymmetric information and price manipulation in stock market
Chiou, Jer-shiou, (2007)
-
Restricted VAR hedging with the presence of multiple breaks
Chiu, Chien-Liang, (2007)
-
Variation of interest-rate parity and its asymmetry on stock return in a jump-diffusion process
Chiou, Jer-shiou, (2006)
- More ...