Time-varying Industrial Portfolio Betas under the Regime-switching Model: Evidence from the Stock Exchange of Thailand

Suthawan Prukumpai ()
Additional contact information
Suthawan Prukumpai: Department of Accounting, Faculty of Business Administration, Kasetsart University Bangkok 10900, Thailand

Applied Economics Journal, 2015, vol. 22, issue 2, 54-76

Abstract: Applications of beta are crucial in determining equity pricing and portfolio strategy. The conditional Capital Asset Pricing Model (CAPM) theory suggests thatsystematic risk factor (henceforth “beta”) is changing over time. Therefore, this paper investigates the time-varying beta behavior in the Stock Exchange of Thailand using the two-regime Markov-switching model. The monthly returns of eight industrial portfolios from July 2005 to September 2014were used in this study. In comparison, the results from the unconditional CAPM beta and three-year rolling regression show that betas are unstable over time. In addition, the linearity LR tests confirmed non-linearity in all of the industrial portfolio returns, suggesting that betas are time-varying. The empirical results from the Markov-switching model showed that the conditional betas could be classified into two regimes: low beta one and high beta one. Overall, the results confirmed that the systematic risk of industrial portfolios is time-varying and regime-dependent. Therefore, the performance of asset allocation and risk management strategies could be improved if investors considered the regime-switching behavior of industrial portfolio returns in the portfolio construction instead of the traditional approach with constant beta.

Keywords: Conditional-CAPM; Markov-Switching Model; Stock Exchange of Thailand (search for similar items in EconPapers)
JEL-codes: C58 G10 G12 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://journal.eco.ku.ac.th/upload/document/thai/20160219091619.pdf

Related works:
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: https://EconPapers.repec.org/RePEc:aej:apecjn:v:22:y:2015:i:2:p:54-76

Access Statistics for this article

Applied Economics Journal is currently edited by Kampanat Pensupar

More articles in Applied Economics Journal from Kasetsart University, Faculty of Economics, Center for Applied Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by Chatrat Hemmawat ().