Applying exogenous variables and regime switching to multi-factor models on equity indices

Pawel Sakowski, Robert Ślepaczuk and Mateusz Wywiał

Ekonomia journal, 2016, vol. 47

Abstract: This article aims to extend the evaluation of classic multi-factor models of Carhart (1997) and to expand analysis performed in Sakowski, Ślepaczuk and Wywiał (2015). We test several modifications of these models to take into account different dynamics of equity excess returns between emerging and developed equity indices. Proposed extensions include volatility regime switching mechanism and three new risk factors. Additionally, we introduce common- and country-specific variables in order to control for global risk. Instead of individual stocks, we use weekly data of 81 world investable equity indices in the period of 2000−2015. We find substantial differences between results for classical models on single stocks and models evaluated for equity indices. Moreover, we observe solid discrepancies between results for developed and emerging markets. Introducing new risk factors and additional variables increase explanatory power of models.

Keywords: asset pricing models; equity risk premia; market price of risk; emerging and developed equity indices (search for similar items in EconPapers)
Date: 2016
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Related works:
Working Paper: Applying Exogenous Variables and Regime Switching To Multifactor Models on Equity Indices (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eko:ekoeko:47_79

DOI: 10.17451/eko/47/2016/210

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