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Testing the international capital asset pricing model with Markov switching model in emerging markets

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  • Korkmaz, Turhan
  • Cevik, Emrah Ismail
  • Gurkan, Serhan

Abstract

The purpose of this article is to examine the relationship between emerging markets and world index and to evaluate the risk of these countries. For this purpose Markov switching model (MS) is used to test ICAPM. The data range of 23 emerging markets that focused on is between January 1995 and April 2009. Empirical results obtained by using likelihood ratio (LR) test shows that MS-ICAPM is preferable to the linear model. The estimated beta coefficients (β) from linear model are between of the estimated beta coefficients (β0 and β1) from MS-ICAPM. These findings suggest that risk can be varying according to the current regime. With this perspective, it is clear that the empirical results in this study would be extremely useful for investors who invest in different countries’ stock market.

Suggested Citation

  • Korkmaz, Turhan & Cevik, Emrah Ismail & Gurkan, Serhan, 2010. "Testing the international capital asset pricing model with Markov switching model in emerging markets," MPRA Paper 71481, University Library of Munich, Germany, revised 2010.
  • Handle: RePEc:pra:mprapa:71481
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    Cited by:

    1. Jaramillo, Laura & Weber, Anke, 2013. "Bond yields in emerging economies: It matters what state you are in," Emerging Markets Review, Elsevier, vol. 17(C), pages 169-185.
    2. Yury Dranev & Sofya Fomkina, 2013. "An asymmetric approach to the cost of equity estimation: empirical evidence from Russia," HSE Working papers WP BRP 12/FE/2013, National Research University Higher School of Economics.

    More about this item

    Keywords

    International CAPM; Markov switching model; emerging markets;

    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
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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