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Conditional CAPM: Time-varying Betas in the Brazilian Market

Author

Listed:
  • Frances Fischberg Blank

    (Pontifícia Universidade Católica do Rio de Janeiro - PUC-Rio)

  • Carlos Patricio Samanez

    (UNIGRANRIO)

  • Tara Keshar Nanda Baidya

    (Pontifícia Universidade Católica do Rio de Janeiro (PUC-Rio) & Petrobras)

  • Fernando Antonio Lucena Aiube

    (Pontifícia Universidade Católica do Rio de Janeiro - PUC-Rio)

Abstract

The conditional CAPM is characterized by time-varying market beta. Based on state-space models approach, beta behavior can be modeled as a stochastic process dependent on conditioning variables related to business cycle and estimated using Kalman filter. This paper studies alternative models for portfolios sorted by size and book-to-market ratio in the Brazilian stock market and compares their adjustment to data. Asset pricing tests based on time-series and cross-sectional approaches are also implemented. A random walk process combined with conditioning variables is the preferred model, reducing pricing errors compared to unconditional CAPM, but the errors are still significant. Cross-sectional test show that book-to-market ratio becomes less relevant, but past returns still capture cross-section variation.

Suggested Citation

  • Frances Fischberg Blank & Carlos Patricio Samanez & Tara Keshar Nanda Baidya & Fernando Antonio Lucena Aiube, 2014. "Conditional CAPM: Time-varying Betas in the Brazilian Market," Brazilian Review of Finance, Brazilian Society of Finance, vol. 12(2), pages 163-199.
    • Handle: RePEc:brf:journl:v:12:y:2014:i:2:p:163-199
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    More about this item

    Keywords

    conditional CAPM; time-varying beta; stock market anomalies; Kalman filter;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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