Association between Markov regime-switching market volatility and beta risk: Evidence from Dow Jones industrial securities
AbstractIn this paper, the volatility of the return generating process of the market portfolio and the slope coefficient of the market model is assumed to follow a Markov switching process of order one. The results indicate very strong evidence of volatility switching behaviour in a sample of returns in the S&P500 index. In three of the thirty securities in the Dow Jones index, the estimated slope in the market model show strong switching behaviour. In these three securities the low risk state is more persistent than the high-risk state. For each security we estimate the conditional probabilities that the security is in the high (low) risk state given the market is in the high (low) volatility regime and show that this information can be used to classify securities into three distinct groups. There is no association between these groups and the securities' constant beta estimated in the market model and the Sharpe index. Some directions for further research are discussed.
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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0406011.
Length: 27 pages
Date of creation: 23 Jun 2004
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Asset pricing; Markov regime-switching; market volatility; beta risk;
Other versions of this item:
- Don U.A. Galagedera & Roland Shami, 2003. "Association between Markov regime-switching market volatility and beta risk: Evidence from Dow Jones industrial securities," Monash Econometrics and Business Statistics Working Papers 20/03, Monash University, Department of Econometrics and Business Statistics.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-06-27 (All new papers)
- NEP-ETS-2004-06-27 (Econometric Time Series)
- NEP-FIN-2004-06-27 (Finance)
- NEP-RMG-2004-06-27 (Risk Management)
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