Improving the Market Model: The 4-State Model Alternative

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Improving the Market Model: The 4-State Model Alternative

Author Info

Octave JOKUNG (Edhec Business School)
Jean-Christophe MEYFREDI (Edhec Business School)

Abstract

The present paper conducts an empirical study by examining the Market Model and the three versions of the 4-State Model (translated, rotated and un-rotated) in a mean-beta framework. Using daily returns from the CAC 40 Index's assets, we find that the explanatory power of the 4-State Model is greater than the one of the Market Model and this effect is improved by rotation. A reduction in the non-systematic risk is also observed when switching from Market Model to 4-State Models. Surprisingly, the betas are more stable when using any version of the 4- State Model. This could have a strong impact on portfolio diversification and call widely held opinion into question.

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Paper provided by EconWPA in its series Finance with number 0403006.

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Length: 24 pages
Date of creation: 30 Mar 2004
Date of revision:
Handle: RePEc:wpa:wuwpfi:0403006

Note: Type of Document - pdf; pages: 24
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Related research
Keywords: Market Model; Arch;

Find related papers by JEL classification:
G - Financial Economics

This paper has been announced in the following NEP Reports:

NEP-ALL-2004-04-04 (All new papers)
NEP-FMK-2004-04-04 (Financial Markets)

References listed on IDEAS
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