Multi-Regime Nonlinear Capital Asset Pricing Models
33 Pages Posted: 27 May 2009
Date Written: April 14, 2009
A multiple-regime threshold generalized autoregressive conditionally heteroskedastic capital asset pricing model is introduced. The model captures asymmetric risk through allowing market beta to change discretely between regimes that are driven by market information. Asymmetric volatility and mean equation dynamics are also captured. We confirm the time-varying nature of market risk, in response to changes in the market, and that this discrete time variation can differ across assets. These findings could have important implications for optimising investment decisions: e.g. in risk assessment, portfolio selection and hedging decisions.
Keywords: Asymmetry, Bayesian, CAPM, Time-varying market beta, Markov chain Monte Carlo method, posterior model probability
JEL Classification: C11, C15, C22, C51, C52
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