International CAPM with Regime Switching GARCH Parameters
AbstractThis paper tests a conditional version of Adler and Dumas'(1983) International CAPM with regime switching GARCH parameters. As benchmark the same model is estimated without state dependent parameters. The switching representation is found to react faster than the benchmark to shocks in stock market returns. This suggests that the non-switching model suffers from spuriously high persistence. In particular, when a financial crisis occurs, the conditional risk exposures appear to be underestimated, while overestimated in the aftermath. The introduction of a regime switching model should hence improve forecasting power. We also find that in periods of financial turmoil, weight is shifting from the GARCH, towards the ARCH termes of the conditional covariance generating process. During such events investors, when formin their (co)variance expectations, seem to put more emphasis on current shocks, at the expense of the current second moments.
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Bibliographic InfoPaper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp17.
Date of creation: Jul 2000
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International CAPM; Multivariate GARCH-in-Mean; Regime Switching;
Find related papers by 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
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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- Francesco Giurda & Elias Tzavalis, 2004. "Is the Currency Risk Priced in Equity Markets?," Working Papers 511, Queen Mary, University of London, School of Economics and Finance.
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