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Time-varying Multivariate Extension of the Linear Market Model for Developed and Emerging Markets

Author

Listed:
  • SERDAR NESL?HANO?LU

    (Eskisehir Osmangazi University)

Abstract

This paper aims to evaluate the effectiveness of a Linear Market Model (consistent with the Two-moment CAPM) which permits beta risk. This evaluation leads to our positing two extensions. The first extension is a time-varying Linear Market Model using state space model which permits for time-varying beta risk. The second is a multivariate extension of the time-varying Linear Market Model permitting the between country stock market correlation structure to be constant over time. The analysis utilises weekly data from several emerging and developed markets for periods both before and after the October 2008 financial crisis. The findings lend great credence to the hypothesis that utilising the multivariate time-varying Linear Market Model is better in terms of in-sample modelling and out-of-sample forecasting procedure for both emerging and developed markets.

Suggested Citation

  • Serdar Nesl?Hano?Lu, 2015. "Time-varying Multivariate Extension of the Linear Market Model for Developed and Emerging Markets," Proceedings of International Academic Conferences 2805282, International Institute of Social and Economic Sciences.
    • Handle: RePEc:sek:iacpro:2805282
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    File URL: https://iises.net/proceedings/19th-international-academic-conference-florence/table-of-content/detail?cid=28&iid=096&rid=5282
    File Function: First version, 2015
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    More about this item

    Keywords

    CAPM; Market model; Time-varying systematic covariance risk; Multivariate state space model; Stock market Integration;
    All these keywords.

    JEL classification:

    • C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other
    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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