Conditional CAPM: Time-varying Betas in the Brazilian Market

Frances Fischberg Blank (), Carlos Patricio Samanez (), Tara Keshar Nanda Baidya () and Fernando Antonio Aiube ()
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Frances Fischberg Blank: Pontifícia Universidade Católica do Rio de Janeiro - PUC-Rio
Carlos Patricio Samanez: UNIGRANRIO
Tara Keshar Nanda Baidya: Pontifícia Universidade Católica do Rio de Janeiro (PUC-Rio) & Petrobras

Brazilian Review of Finance, 2014, vol. 12, issue 2, 163-199

Abstract: The conditional CAPM is characterized by time-varying market beta. Based on state-space models approach, beta behavior can be modeled as a stochastic process dependent on conditioning variables related to business cycle and estimated using Kalman filter. This paper studies alternative models for portfolios sorted by size and book-to-market ratio in the Brazilian stock market and compares their adjustment to data. Asset pricing tests based on time-series and cross-sectional approaches are also implemented. A random walk process combined with conditioning variables is the preferred model, reducing pricing errors compared to unconditional CAPM, but the errors are still significant. Cross-sectional test show that book-to-market ratio becomes less relevant, but past returns still capture cross-section variation.

Keywords: conditional CAPM; time-varying beta; stock market anomalies; Kalman filter (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:brf:journl:v:12:y:2014:i:2:p:163-199

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