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A conditional CAPM; implications for the estimation of systematic risk

Author

Listed:
  • Alexandros E. Milionis

    (Bank of Greece)

  • Dimitra K. Patsouri

    (University of Athens)

Abstract

The purpose of this paper is to examine: (i) whether or not, the residuals of the Market Model are conditionally heteroscedastic; (ii) whether or not, there exists an intervalling effect in conditional heteroscedasticity in the residuals of the Market Model; (iii) the effect of conditional heteroscedasticity on the estimation of systematic risk.; as well as to propose a simple data driven conditional CAPM. To this end daily closing price of stocks traded at the Athens Stock Exchange are used. Empirical evidence is provided for the existence of: (a) conditional heteroscedasticity in MM residuals; (b) a pronounced intervalling effect on ARCH in MM residuals; (c) GARCH in mean type of conditional heteroscedasticity for the majority of cases where ARCH was present in MM residuals. These findings in terms of theory are conducive to a conditional CAPM, which takes into account the effect of conditional variance on expected returns, rather than the standard CAPM. Furthermore, in terms of practical implications these findings may lead to better estimates of systematic risk.

Suggested Citation

  • Alexandros E. Milionis & Dimitra K. Patsouri, 2011. "A conditional CAPM; implications for the estimation of systematic risk," Working Papers 131, Bank of Greece.
    • Handle: RePEc:bog:wpaper:131
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    References listed on IDEAS

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    Cited by:

    1. Dragos Stefan Oprea, 2015. "The Interval Effect in Estimating Beta: Empirical Evidence from the Romanian Stock Market," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 7(2), pages 016-025, December.

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    More about this item

    Keywords

    Conditional Capital Asset Pricing Model; Market Model; Conditional Volatility; Systematic Risk; Intervalling Effect; Athens Stock Exchange.;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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