Estimates of the ICAPM with regime-switching betas: evidence from four pacific rim economies
This article examines the relation between stock returns and the World Index for four Pacific Rim economies, i.e. that of Taiwan, Hong Kong, South Korea and Malaysia. When the constant International Capital Asset Pricing Model (ICAPM) and the regime-switching ICAPM are considered, the evidence shows that the estimated beta coefficients from the constant ICAPM model underestimates systemic risk under the high-volatility regime, but overestimates systemic risk under the low-volatility regime. In addition, the evidence is strong that the stock markets of Taiwan and Malaysia are less risky for traders, whereas that of South Korea is risk-neutral. The Hong Kong Hang Seng stock index, on the other hand, is highly risky for both speculators and investors. On the weight of the evidence, it is suggested that estimates of the ICAPM should account for the changes in betas over time and over different variance regimes.
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Volume (Year): 17 (2007)
Issue (Month): 4 ()
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