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Capital asset pricing model on UK securities using ARCH

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  • David Morelli
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    Abstract

    This study tests conditional and unconditional versions of the CAPM using portfolios made up of security returns in the UK over the period January 1980-December 1999. The main objectives are to see if the GARCH betas differ from the unconditional betas, and to see if the market risk premium is positive. The CAPM tests are two-pass, where monthly returns are regressed on alternative beta estimates, and the time series mean of the coefficients is the average market premium. It is found that the GARCH and unconditional betas are correlated, either 0.475 or 0.575 depending on the method used. Using unconditional betas the average market premium is negative, but not statistically significant. Using conditional betas the average market premium is positive but not statistically significant. For some individual years a positive statistically significant risk premium is found. These individual years tend to correspond to periods when the stock market was particularly volatile which would tend to suggest that the model has value during periods of relatively high volatility.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

    Volume (Year): 13 (2003)
    Issue (Month): 3 ()
    Pages: 211-223

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    Handle: RePEc:taf:apfiec:v:13:y:2003:i:3:p:211-223

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    Web page: http://www.tandfonline.com/RAFE20

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    1. De Santis, Giorgio & Gerard, Bruno, 1997. " International Asset Pricing and Portfolio Diversification with Time-Varying Risk," Journal of Finance, American Finance Association, vol. 52(5), pages 1881-1912, December.
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    14. repec:cup:etheor:v:11:y:1995:i:1:p:122-50 is not listed on IDEAS
    15. Beenstock, Michael & Chan, Kam-Fai, 1986. "Testing the Arbitrage Pricing Theory in the United Kingdom," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(2), pages 121-41, May.
    16. Gibbons, Michael R., 1982. "Multivariate tests of financial models : A new approach," Journal of Financial Economics, Elsevier, vol. 10(1), pages 3-27, March.
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    18. Ferson, Wayne E & Kandel, Shmuel & Stambaugh, Robert F, 1987. " Tests of Asset Pricing with Time-Varying Expected Risk Premiums and Market Betas," Journal of Finance, American Finance Association, vol. 42(2), pages 201-20, June.
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    Cited by:
    1. Tienyu Hwang & Simon Gao & Heather Owen, 2012. "A two-pass model study of the CAPM: evidence from the UK stock market," Studies in Economics and Finance, Emerald Group Publishing, vol. 29(2), pages 89-104, June.
    2. Monica Billio & Massimiliano Caporin & Michele Gobbo, 2006. "Flexible Dynamic Conditional Correlation multivariate GARCH models for asset allocation," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 2(2), pages 123-130, March.

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