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Inter-temporal CAPM: an empirical test with Brazilian market data

Author

Listed:
  • Octavio Portolano Machado

    () (Insper Instituto de Ensino e Pesquisa e PUC - Rio)

  • Adriana Bruscato Bortoluzzo

    () (Insper Instituto de Ensino e Pesquisa)

  • Sérgio Ricardo Martins

    () (Insper Instituto de Ensino e Pesquisa)

  • Antonio Zoratto Sanvicente

    () (Insper Instituto de Ensino e Pesquisa)

Abstract

This paper examines the empirical validity of the Inter-temporal Capital Asset Pricing Model (ICAPM) with Brazilian market data. The Bali and Engle (2010) methodology is used with the estimation of conditional covariances between stock portfolio returns and pricing factors. The covariances are then used as explanatory variables in the pricing equation. The results validate the model for the 1988 to 2012 period. The estimated risk aversion coefficient is positive and significant, and the relevant pricing factors are interest rates, inflation and gold prices; the reverse is true in the case of the exchange rate. Breaking up the sample period into sub-periods indicates that major events (changes in economic regimes and the 2008 crisis) are capable of modifying the associations observed and reducing the model’s validity.

Suggested Citation

  • Octavio Portolano Machado & Adriana Bruscato Bortoluzzo & Sérgio Ricardo Martins & Antonio Zoratto Sanvicente, 2013. "Inter-temporal CAPM: an empirical test with Brazilian market data," Brazilian Review of Finance, Brazilian Society of Finance, vol. 11(2), pages 149-180.
  • Handle: RePEc:brf:journl:v:11:y:2013:i:2:p:149-180
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Intertemporal CAPM; conditional correlations; risk aversion coefficient;

    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; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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