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Estimation of an International Capital Asset Pricing Model with Stocks and Government Bonds

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  • Tom A. FEARNLEY

    (Graduate Institute of International Studies and FAME)

Abstract

The paper investigates whether US, Japanese and European stock and government bond return indices are jointly priced within a conditional multivariate form of the international Capital asset Pricing Model during the period 1993-2001. It also explores the time variation of the price of market risk within this framework, allowing for a structural change in the prices of market and currency risk. The corresponding conditional optimal portfolio weights are compared with the observed market capitalization weights of the assets. The agreement is found to be better for the stock markets than for the bond markets. Finally, out-of-sample performance of the conditional optimal portfolio is measured relative to the market portfolio of stocks and bonds.

Suggested Citation

  • Tom A. FEARNLEY, 2002. "Estimation of an International Capital Asset Pricing Model with Stocks and Government Bonds," FAME Research Paper Series rp95, International Center for Financial Asset Management and Engineering.
    • Handle: RePEc:fam:rpseri:rp95
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    Cited by:

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    2. Horioka, Charles Yuji & Terada-Hagiwara, Akiko & Nomoto, Takaaki, 2015. "Explaining Foreign Holdings of Asia's Debt Securities: The Feldstein-Horioka Paradox Revisited," AGI Working Paper Series 2015-16, Asian Growth Research Institute.
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    4. Terada-Hagiwara, Akiko, 2011. "Asian holding of US Treasury securities: Trade integration as a threshold," Journal of the Japanese and International Economies, Elsevier, vol. 25(3), pages 321-335, September.
    5. Horioka, Charles Yuji & Nomoto, Takaaki & Terada-Hagiwara, Akiko, 2014. "Explaining Foreign Holdings of Asia’s Debt Securities," Working Papers on Regional Economic Integration 124, Asian Development Bank.
    6. Turhan Korkmaz & Emrah I. Çevik & Elif Birkan & Nesrin ÖzataÇ, 2010. "Testing Capm using Markov Switching Model: The Case of Coal Firms," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 23(2), pages 44-59, January.

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    More about this item

    Keywords

    International CAPM; Multivariate GARCH-in-Mean;

    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
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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