International CAPM with Regime Switching GARCH Parameters

Lorenzo Cappiello and Tom A. Fearnley
Additional contact information
Tom A. Fearnley: Graduate Institute of International Studies, University of Geneva;International Center fo Financial Asset Management and Engineering (FAME), Geneva Switzerland; Central Bank of Norway, Oslo

FAME Research Paper Series from International Center for Financial Asset Management and Engineering

Abstract: This paper tests a conditional version of Adler and Dumas'(1983) International CAPM with regime switching GARCH parameters. As benchmark the same model is estimated without state dependent parameters. The switching representation is found to react faster than the benchmark to shocks in stock market returns. This suggests that the non-switching model suffers from spuriously high persistence. In particular, when a financial crisis occurs, the conditional risk exposures appear to be underestimated, while overestimated in the aftermath. The introduction of a regime switching model should hence improve forecasting power. We also find that in periods of financial turmoil, weight is shifting from the GARCH, towards the ARCH termes of the conditional covariance generating process. During such events investors, when formin their (co)variance expectations, seem to put more emphasis on current shocks, at the expense of the current second moments.

Keywords: International CAPM; Multivariate GARCH-in-Mean; Regime Switching (search for similar items in EconPapers)
JEL-codes: C32 G12 G15 (search for similar items in EconPapers)
Date: 2000-07
References: Add references at CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www.swissfinanceinstitute.ch/rp17.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.swissfinanceinstitute.ch/rp17.pdf [301 Moved Permanently]--> https://www.sfi.ch/rp17.pdf [302 Found]--> https://www.sfi.ch/en/rp17.pdf)

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:fam:rpseri:rp17

Access Statistics for this paper

More papers in FAME Research Paper Series from International Center for Financial Asset Management and Engineering Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().