Capital Asset Pricing Model, Bear, Usual and Bull Market Conditions and Beta Instability: A Value-At-Risk Approach

Topics:
Investment and Capital Markets
Tags:
Business Operations,
Capital Asset Pricing Model,
Finance,
Investment,
Northwestern University,
Research & Development
Source:
Northwestern University

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Overview: This paper defines three market scenarios, namely, bad, usual and good, conditional on the quantiles of the market returns distribution. It investigates the asymmetric response of beta to these market conditions by modeling the mean and the volatility of CAPM as nonlinear threshold models with three regimes. The results are in accordance with the widely held view that the portfolio beta increases (decreases) when the market is bearish (bullish). Further, estimates of risk premiums in the cross-sectional beta-return relationship indicate that the risk premium is positive and highly significant for the usual-market-beta, while those corresponding to extreme market conditions are statistically insignificant.

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Format: PDF | Size: 166KB | Date: Jun 2001 | Pages: 27

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