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Tests of the CAPM with Time-Varying Covariances: A Multivariate GARCH Approach

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  • Ng, Lilian
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    Abstract

    This paper examines an asset pricing model in which the Sharpe-Lintner capital asset pricing model and the zero-beta capital asset pricing model are special cases. The model allows the ratio of expected market risk premium to market variance, the conditional expected excess returns, and the risks to change over time. The results are found to be sensitive to the choice of the portfolio formation techniques. Significant time variability is shown in the conditional expected excess asset returns and risks and also in the reward-to-risk ratio. Copyright 1991 by American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal Journal of Finance.

    Volume (Year): 46 (1991)
    Issue (Month): 4 (September)
    Pages: 1507-21

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    Handle: RePEc:bla:jfinan:v:46:y:1991:i:4:p:1507-21

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    Cited by:
    1. Nilsson, Birger, 2002. "International Asset Pricing and the Benefits from World Market Diversification," Working Papers 2002:1, Lund University, Department of Economics.
    2. Lee, Yen-Hsien & Tucker, Alan L. & Wang, David K. & Pao, Hsin-Ting, 2014. "Global contagion of market sentiment during the US subprime crisis," Global Finance Journal, Elsevier, vol. 25(1), pages 17-26.
    3. Tang, Gordon Y. N. & Shum, Wai Cheong, 2004. "The risk-return relations in the Singapore stock market," Pacific-Basin Finance Journal, Elsevier, vol. 12(2), pages 179-195, April.
    4. Menelaos Karanasos, . "The Covariance Structure of Component and Multivariate Garch Models," Discussion Papers 99/12, Department of Economics, University of York.
    5. Chevapatrakul, Thanaset, 2013. "Return sign forecasts based on conditional risk: Evidence from the UK stock market index," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2342-2353.
    6. Menelaos Karanasos, . "Some Exact Formulae for the Constant Correlation and Diagonal M - Garch Models," Discussion Papers 00/14, Department of Economics, University of York.
    7. Calzolari, Giorgio & Fiorentini, Gabriele, 1994. "Conditional heteroskedasticity in nonlinear simultaneous equations," MPRA Paper 24428, University Library of Munich, Germany.
    8. Su, EnDer, 2013. "Measuring and Testing Tail Dependence and Contagion Risk between Major Stock Markets," MPRA Paper 48444, University Library of Munich, Germany.
    9. Young-Hye Cho & Robert F. Engle, 1999. "Time-Varying Betas and Asymmetric Effect of News: Empirical Analysis of Blue Chip Stocks," NBER Working Papers 7330, National Bureau of Economic Research, Inc.
    10. Murtazashvili, Irina & Vozlyublennaia, Nadia, 2012. "The role of data limitations, seasonality and frequency in asset pricing models," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 555-574.
    11. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
    12. Su, EnDer, 2013. "Stock index hedge using trend and volatility regime switch model considering hedging cost," MPRA Paper 49190, University Library of Munich, Germany.
    13. Attiya Y. Javed, 2000. "Alternative Capital Asset Pricing Models: A Review of Theory and Evidence," PIDE-Working Papers 2000:179, Pakistan Institute of Development Economics.

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