Cross-Sectional Returns With Volatility Regimes From Diverse Portfolio of Emerging and Developed Equity Indices

Pawel Sakowski, Robert Ślepaczuk and Mateusz Wywiał
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Mateusz Wywiał: Faculty of Economic Sciences, University of Warsaw; Quedex Derivatives Exchange

No 2015-39, Working Papers from Faculty of Economic Sciences, University of Warsaw

Abstract: This article aims to extend evaluation of classic multifactor model of Carhart (1997) for the case of global equity indices and to expand analysis performed in Sakowski et. al.(2015). Our intention is to test several modifications of these models to take into account different dynamics of equity excess returns between emerging and developed equity indices. Proposed extensions include volatility regime switching mechanism (using dummy variables and the Markov approach) and the fifth risk factor based on realized volatility of index returns. Moreover, instead of using data for stocks of a particular market (which is a common approach in the literature), we check performance of these models for weekly data of 81 world investable equity indices in the period of 2000-2015. Such approach is proposed to estimate equity risk premium for a single country. Empirical evidence reveals important differences between results for classical models estimated on single stocks (either in international or US-only framework) and models evaluated for equity indices. Additionally, we observe substantial discrepancies between results for developed countries and emerging markets. Finally, using weekly data for the last 15 years we illustrate importance of model risk and data overfitting effects when drawing conclusions upon results of multifactor models.

Keywords: cross-sectional models; asset pricing models; equity risk premia; equity indices; new risk factors; sensitivity analysis; book to market; momentum; market price of risk; emerging and developed equity indices; data overfitting; model risk (search for similar items in EconPapers)
JEL-codes: C15 F30 G11 G12 G13 G14 G15 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2015
New Economics Papers: this item is included in nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://www.wne.uw.edu.pl/index.php/download_file/2176/ First version, 2015 (application/pdf)

Related works:
Journal Article: CROSS-SECTIONAL RETURNS WITH VOLATILITY REGIMES FROM A DIVERSE PORTFOLIO OF EMERGING AND DEVELOPED EQUITY INDICES (2016)
Journal Article: Cross-Sectional Returns with Volatility Regimes from a Diverse Portfolio of Emerging and Developed Equity Indices (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:war:wpaper:2015-39

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