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Testing the conditional CAPM using multivariate GARCH-M

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  • Bjorn Hansson
  • Peter Hordahl

Abstract

The relation between expected return and time varying risk on the Swedish stock market for the period 1977 to 1990 is examined. Using a parsimonious multivariate GARCH-M model, the conditional Sharpe - Lintner - Mossin CAPM is tested against six alternative hypotheses, including the zero-beta version of CAPM, a conditional residual risk model, and models which nest the international CAPM and the consumption CAPM. The hypotheses are tested using beta-ranked, size-ranked, and industry-sorted portfolios. The estimates for the null hypothesis show that the price of risk is positive and significant for all portfolio groupings. Using robust LM-tests, the null hypothesis cannot be rejected in favour of any of the alternative hypotheses. In contrast to international evidence, where the traditional CAPM very often is rejected in favour of asset pricing models that rely on more general measures of risk, these results provide strong support for the Sharpe - Lintner - Mossin version of the conditional CAPM.

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Bibliographic Info

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

Volume (Year): 8 (1998)
Issue (Month): 4 ()
Pages: 377-388

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Handle: RePEc:taf:apfiec:v:8:y:1998:i:4:p:377-388

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Cited by:
  1. Johansson, Anders C., 2009. "An Analysis Of Dynamic Risk In The Greater China Equity Markets," Working Paper Series 2009-5, China Economic Research Center, Stockholm School of Economics.
  2. Gómez-Déniz, E., 2004. "A note on mixture prior distributions with applications in actuarial statistic/Sobre las Distribuciones a Priori Mixtas con Aplicaciones en la Estadística Actuarial," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 22, pages 372 (15 pá, Agosto.
  3. Massimiliano Caporin & Michael McAleer, 2010. "Thresholds, News Impact Surfaces and Dynamic Asymmetric Multivariate GARCH," Working Papers in Economics 10/73, University of Canterbury, Department of Economics and Finance.
  4. Morelli, David, 2011. "Joint conditionality in testing the beta-return relationship: Evidence based on the UK stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(1), pages 1-13, February.
  5. Jin Zhang & Dietmar Maringer, 2010. "Asset Pair-Copula Selection with Downside Risk Minimization," Working Papers 037, COMISEF.
  6. Silvennoinen, Annastiina & Teräsvirta, Timo, 2007. "Multivariate GARCH models," Working Paper Series in Economics and Finance 669, Stockholm School of Economics, revised 18 Jan 2008.
  7. Su, EnDer, 2013. "Measuring and Testing Tail Dependence and Contagion Risk between Major Stock Markets," MPRA Paper 48444, University Library of Munich, Germany.
  8. Martin Scheicher, 2000. "Time-varying risk in the German stock market," The European Journal of Finance, Taylor & Francis Journals, vol. 6(1), pages 70-91.
  9. Su, EnDer, 2013. "Stock index hedge using trend and volatility regime switch model considering hedging cost," MPRA Paper 49190, University Library of Munich, Germany.
  10. David Morelli, 2003. "Capital asset pricing model on UK securities using ARCH," Applied Financial Economics, Taylor & Francis Journals, vol. 13(3), pages 211-223.
  11. BAUWENS, Luc & LAURENT, Sébastien & ROMBOUTS, Jeroen VK, . "Multivariate GARCH models: a survey," CORE Discussion Papers RP -1847, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  12. 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.

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