Markov Switching International Capital Asset Pricing Model, an Emerging Market Case: Mexico

Humberto Valencia-Herrera and Francisco López-Herrera
Authors registered in the RePEc Author Service: Francisco López-Herrera ()

Journal of Emerging Market Finance, 2018, vol. 17, issue 1, 96-129

Abstract: The article shows how the international capital asset pricing model (ICAPM) with Markov regime switching can model the asset returns in the emerging market of Mexico. For most assets, although significant, the international risk premium factor is not subject to regime switching, but the domestic factor is. The probabilities of regimes are correlated with the volatility of assets. A GARCH(1,1) Markov regime switching model offers better adjustment than a non-GARCH. JEL Classification: C58, F36, F65, G12, G15

Keywords: International asset pricing model; Markov regime switching; GARCH (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:sae:emffin:v:17:y:2018:i:1:p:96-129

DOI: 10.1177/0972652717748089

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