International Asset Pricing and the Benefits from World Market Diversification
AbstractThis paper extends previous tests of the conditional CAPM using different asymmetric and non-diagonal multivariate GARCH-M specifications for eight large national markets and the world market simultaneously. To solve the well-known problems associated with the likelihood functions of multivariate GARCH models, maximization is performed using simulated annealing, a Markov Chain Monte Carlo stochastic optimization method. We find that a model with double asymmetric effects and a time-varying price of world covariance risk supports all tested asset-pricing restrictions and that the previously often employed symmetric diagonal specification is overwhelmingly rejected. The evidence suggests that investors from all countries could expect statistically significant benefits from international diversification but that gains are considerable larger for investors with smaller home markets than for US and Japanese investors.
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Bibliographic InfoPaper provided by Lund University, Department of Economics in its series Working Papers with number 2002:1.
Length: 44 pages
Date of creation: 01 Feb 2002
Date of revision:
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Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/
More information through EDIRC
international asset pricing; portfolio diversification; asymmetric and non-diagonal multivariate GARCH; simulated annealing;
Find related papers by JEL classification:
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-02-10 (All new papers)
- NEP-FMK-2002-02-15 (Financial Markets)
- NEP-PKE-2002-02-15 (Post Keynesian Economics)
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