Multi-regime nonlinear capital asset pricing models

A multiple-regime threshold generalized autoregressive conditionally heteroskedastic capital asset pricing model is introduced. The model captures asymmetric risk through allowing market beta to change discretely between regimes that are driven by market information. Asymmetric volatility and mean e...

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Bibliographic Details
Published in:Quantitative finance 2011-09, Vol.11 (9), p.1421-1438
Main Authors: Chen, Cathy W. S., Gerlach, Richard H., Lin, Ann M. H.
Format: Article
Language:English
Subjects:
ARCH
Asymmetry
Bayesian analysis
Capital assets
CAPM
Financial time series
Investment policy
Risk assessment
Studies
Time series economics
Value at Risk
Volatility
Volatility modelling
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Summary:A multiple-regime threshold generalized autoregressive conditionally heteroskedastic capital asset pricing model is introduced. The model captures asymmetric risk through allowing market beta to change discretely between regimes that are driven by market information. Asymmetric volatility and mean equation dynamics are also captured. We confirm the time-varying nature of market risk, in response to changes in the market, and that this discrete time variation can differ across assets. These findings could have important implications for optimizing investment decisions: e.g. in risk assessment, portfolio selection and hedging decisions.
ISSN:1469-7688
1469-7696
DOI:10.1080/14697680902968013