Time-varying betas help in asset pricing: The threshold CAPM
STUDIES IN NONLINEAR DYNAMICS AND ECONOMETRICS, cilt.6, sa.4, 2003 (SSCI, Scopus)
- Yayın Türü: Makale / Tam Makale
- Cilt numarası: 6 Sayı: 4
- Basım Tarihi: 2003
- Doi Numarası: 10.2202/1558-3708.1101
- Dergi Adı: STUDIES IN NONLINEAR DYNAMICS AND ECONOMETRICS
- Derginin Tarandığı İndeksler: Social Sciences Citation Index (SSCI), Scopus
- Açık Arşiv Koleksiyonu: AVESİS Açık Erişim Koleksiyonu
- TED Üniversitesi Adresli: Hayır
Özet
Although there is a consensus about time variation in market betas, it is not clear how this variation should be captured. Several researchers continue to analyze different versions of the conditional CAPM. However, Ghysels (1998) shows that these conditional CAPM models fail to capture the dynamics of beta risk. In this study, we introduce a new model, threshold CAPM, which outperforms both the conditional and unconditional CAPMs by generating smaller pricing errors. We also show that the beta risk changes through time with the changes in the economic environment and the dynamics of time variation of beta differ across industries. These findings have important implications for asset allocation, portfolio selection, and hedging decisions.