A two-phase approach to estimating time-varying parameters in the capital asset pricing model

Yih Su and Jing-Shiang Hwang

Journal of Applied Statistics, 2009, vol. 36, issue 1, 79-89

Abstract: Following the development of the economy and the diversification of investment, mutual funds are a popular investment tool nowadays. Choosing excellent targets from hundreds of mutual funds has become more and more crucial to investors. The capital asset pricing model (CAPM) has been widely used in the capital cost estimation and performance evaluation of mutual funds. In this study, we propose a new two-phase approach to estimating the time-varying parameters of CAPM. We implemented a simulation study to evaluate the efficiency of the proposed method and compared it with the commonly used state space and rolling regression methods. The results showed that the new method is more efficient in most scenarios. Meanwhile, the proposed approach is very practical and it is unnecessary to judge and adjust the estimating process for different situations. Finally, we applied the proposed method to equity mutual funds in the Taiwan stock market and reported the performances of two funds for demonstration.

Keywords: CAPM; two-phase estimation; time-varying parameter (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (4)

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DOI: 10.1080/02664760802443871

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