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Applying exogenous variables and regime switching to multi-factor models on equity indices

Author

Listed:
  • Paweł Sakowski
  • Robert Ślepaczuk
  • Mateusz Wywiał

Abstract

This article aims to extend the evaluation of classic multi-factor models of Carhart (1997) and to expand analysis performed in Sakowski, Ślepaczuk and Wywiał (2015). We test several modifications of these models to take into account different dynamics of equity excess returns between emerging and developed equity indices. Proposed extensions include volatility regime switching mechanism and three new risk factors. Additionally, we introduce common- and country-specific variables in order to control for global risk. Instead of individual stocks, we use weekly data of 81 world investable equity indices in the period of 2000−2015. We find substantial differences between results for classical models on single stocks and models evaluated for equity indices. Moreover, we observe solid discrepancies between results for developed and emerging markets. Introducing new risk factors and additional variables increase explanatory power of models.

Suggested Citation

  • Paweł Sakowski & Robert Ślepaczuk & Mateusz Wywiał, 2016. "Applying exogenous variables and regime switching to multi-factor models on equity indices," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 47.
    • Handle: RePEc:eko:ekoeko:47_79
    DOI: 10.17451/eko/47/2016/210
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    File URL: http://ekonomia.wne.uw.edu.pl/ekonomia/getFile/801
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    Cited by:

    1. Paweł Sakowski & Robert Ślepaczuk & Mateusz Wywiał, 2016. "Can We Invest Based on Equity Risk Premia and Risk Factors from Multi-Factor Models?," Working Papers 2016-09, Faculty of Economic Sciences, University of Warsaw.

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    More about this item

    Keywords

    asset pricing models; equity risk premia; market price of risk; emerging and developed equity indices;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • F30 - International Economics - - International Finance - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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