MODELING THE RISK AND RETURN RELATION CONDITIONAL ON MARKET VOLATILITY AND MARKET CONDITIONS

Don (Tissa) U. A. Galagedera and Robert William Faff

International Journal of Theoretical and Applied Finance (IJTAF), 2005, vol. 08, issue 01, pages 75-95

Abstract: This paper investigates whether the risk-return relation varies, depending on changing market volatility and up/down market conditions. Three market regimes based on the level of conditional volatility of market returns are specified — "low", "neutral" and "high". The market model is extended to allow for these three market regimes and a three-beta asset-pricing model is developed. For a set of US industry sector indices using a cross-sectional regression, we find that the beta risk premium in the three market volatility regimes is priced. These significant results are uncovered only in the pricing model that accommodates up/down market conditions.

Keywords: CAPM; conditional market volatility; modeling conditional betas (search for similar items in EconPapers)
Date: 2005

Downloads: (external link)
http://www.worldscinet.com/cgi-bin/details.cgi?type=pdf&id=pii:S0219024905002901 (application/pdf)
http://www.worldscinet.com/cgi-bin/details.cgi?typ ... ii:S0219024905002901 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Modelling the Risk and Return Relation Conditional on Market Volatility and Market Conditions (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:wsi:ijtafx:v:08:y:2005:i:01:p:75-95

Ordering information: This journal article can be ordered from

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Series data maintained by Tai Tone Lim ().