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Multivariate time-varying parameter modelling for stock markets

Author

Listed:
  • Serdar Neslihanoglu

    (Eskisehir Osmangazi University)

  • Stelios Bekiros

    (European University Institute
    Wilfrid Laurier University)

  • John McColl

    (University of Glasgow)

  • Duncan Lee

    (University of Glasgow)

Abstract

This paper evaluates the appropriateness of a Linear Market Model (LMM) which allows for systematic covariance (beta) risk. The performance of LMM will be compared against two extensions, a comparison having yet to be undertaken in the literature. The first extension is the Time-varying Linear Market Model (Tv-LMM) which allows for time-varying systematic covariance risk in the form of a mean reverting state space model via the Kalman filter. The second extension is the multivariate Time-varying Linear Market Model (MTv-LMM) which allows for the time-varying systematic covariance risk of country stock market correlation structure via the multivariate KFMR. The comparison between LMM, Tv-LMM and MTv-LMM, is implemented utilising weekly data collected from several developed and emerging markets for the periods; before and after financial crisis in October 2008, and forecasting 2 years forwards. The empirical findings of that process overwhelmingly support the use of the Multivariate Time-varying Linear Market Model (MTv-LMM) when modelling and forecasting stock market returns, especially for developed stock markets.

Suggested Citation

  • Serdar Neslihanoglu & Stelios Bekiros & John McColl & Duncan Lee, 2021. "Multivariate time-varying parameter modelling for stock markets," Empirical Economics, Springer, vol. 61(2), pages 947-972, August.
    • Handle: RePEc:spr:empeco:v:61:y:2021:i:2:d:10.1007_s00181-020-01896-2
    DOI: 10.1007/s00181-020-01896-2
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    More about this item

    Keywords

    CAPM; Multivariate model; State space model; Stock market returns; Systematic covariance (beta) risk; Time-varying beta;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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