REEXAMINATION OF DYNAMIC BETAINTERNATIONAL CAPM: A SUR WITH GARCH APPROACH

Kusdhianto Setiawan

Review of Economic and Business Studies, 2012, issue 10, 105-127

Abstract: Considering the heteroscedasticity and cross-correlation in the error terms of international stock market returns, International Capital Asset Pricing Model (CAPM) is reinvestigated under Seemingly Unrelated Regression (SUR) and SUR with GARCH (SURGARCH) framework.We modified Feasible Generalized Least Square (FGLS) estimator to take into account multivariate GARCH error structure in estimating the model. World market portfolio was constructed to ensure that the market portfolio is mean-variance efficient under no restriction on short selling and borrowing at riskless rate. CAPM fits well only on ex-post SUR test, but it is rejected on SUR-GARCH for both ex-ante and ex-post test. However, this paper found that CAPM could be applied for most stock market indexes when each equation in SUR system was analyzed individually.

Keywords: CAPM; Time Varying Beta; Seemingly Unrelated Regression (SUR); multivariate GARCH (search for similar items in EconPapers)
JEL-codes: G11 G12 G15 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:aic:revebs:y:2012:i:10:setiawank

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