Multivariate time-varying parameter modelling for stock markets

Serdar Neslihanoglu (), Stelios Bekiros, John McColl and Duncan Lee
Additional contact information
Serdar Neslihanoglu: Eskisehir Osmangazi University
John McColl: University of Glasgow
Duncan Lee: University of Glasgow

Empirical Economics, 2021, vol. 61, issue 2, No 15, 947-972

Abstract: Abstract This paper evaluates the appropriateness of a Linear Market Model (LMM) which allows for systematic covariance (beta) risk. The performance of LMM will be compared against two extensions, a comparison having yet to be undertaken in the literature. The first extension is the Time-varying Linear Market Model (Tv-LMM) which allows for time-varying systematic covariance risk in the form of a mean reverting state space model via the Kalman filter. The second extension is the multivariate Time-varying Linear Market Model (MTv-LMM) which allows for the time-varying systematic covariance risk of country stock market correlation structure via the multivariate KFMR. The comparison between LMM, Tv-LMM and MTv-LMM, is implemented utilising weekly data collected from several developed and emerging markets for the periods; before and after financial crisis in October 2008, and forecasting 2 years forwards. The empirical findings of that process overwhelmingly support the use of the Multivariate Time-varying Linear Market Model (MTv-LMM) when modelling and forecasting stock market returns, especially for developed stock markets.

Keywords: CAPM; Multivariate model; State space model; Stock market returns; Systematic covariance (beta) risk; Time-varying beta (search for similar items in EconPapers)
JEL-codes: C53 G12 G17 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s00181-020-01896-2 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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:spr:empeco:v:61:y:2021:i:2:d:10.1007_s00181-020-01896-2

Ordering information: This journal article can be ordered from
http://www.springer. ... rics/journal/181/PS2

DOI: 10.1007/s00181-020-01896-2

Access Statistics for this article

Empirical Economics is currently edited by Robert M. Kunst, Arthur H.O. van Soest, Bertrand Candelon, Subal C. Kumbhakar and Joakim Westerlund

More articles in Empirical Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().