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Information Flow Interpretation of Heteroskedasticity for Capital Asset Pricing: An Expectation-based View of Risk

Chamil W Senarathne and Prabhath Jayasinghe

MPRA Paper from University Library of Munich, Germany

Abstract: The Heteroskedastic Mixture Model (HMM) of Lamoureux, and Lastrapes (1990) is extended, relaxing the restriction imposed on the mean i.e. μt-1=0 . Instead, an exogenous variable rm, along with its vector βm, that predicts return rt is introduced to examine the hypothesis that the volume is a measure of speed of evolution in the price change process in capital asset pricing. The empirical findings are documented for the hypothesis that ARCH is a manifestation of time dependence in the rate of information arrival, in line with the observations of Lamoureux, and Lastrapes (1990). The linkage between this time dependence and the expectations of market participants is investigated and the symmetric behavioural response is documented. Accordingly, the tendency of revision of expectation in the presence of new information flow whose frequency as measured by ‘volume clock’ is observed. In the absence of new information arrival at the market, investors tend to follow the market on average. When new information is available, the expectations of investors are revised in the same direction as a symmetric response to the flow of new information arrival at the market.

Keywords: Mixture of Distribution Hypothesis; Information Flow; Stock Volume; Systematic Risk; Capital Asset Pricing; ARCH; GARCH (search for similar items in EconPapers)
JEL-codes: C01 C58 D53 G12 G14 G17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mst and nep-ore
Date: 2017-03, Revised 2017-04-04
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Published in Economic Issues 22.1(2017): pp. 1-24

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