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Testing Capm using Markov Switching Model: The Case of Coal Firms

Author

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  • Turhan Korkmaz
  • Emrah I. Çevik
  • Elif Birkan
  • Nesrin ÖzataÇ

Abstract

In this study, the relation between the coal firms that are traded in New York Stock Exchange and S&P500index is analyzed. The return of the coal firms and the market return are analyzed by using traditional CAPM and two-stateMarkov regime switching CAPM (MS-CAPM). According to the Likelihood Ratio test, two-state regime MS-CAPM gives better results and indicates a non-linear relation between return and risk. It is found that beta shows variability in regard to low and high volatile periods making linear CAPM to provide deviated results.1

Suggested Citation

  • Turhan Korkmaz & Emrah I. Çevik & Elif Birkan & Nesrin ÖzataÇ, 2010. "Testing Capm using Markov Switching Model: The Case of Coal Firms," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 23(2), pages 44-59, January.
    • Handle: RePEc:taf:reroxx:v:23:y:2010:i:2:p:44-59
    DOI: 10.1080/1331677X.2010.11517411
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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