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Global macroeconomic shocks, time-varying covariances and tests of the international CAPM

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  • Andrew Clare
  • Raymond O'Brien
  • Peter Smith
  • Stephen Thomas

Abstract

The mean variance efficiency (MVE) of a portfolio of international bonds and equities is tested using a CAPM model of excess returns. The conditional variances and covariances of the portfolio returns are allowed to time-vary according to shocks in up to three global macro-economic variables simultaneously. Athough the hypothesis of MVE is easily rejected within a static version of the CAPM this is not the case at conventional significance levels in the CAPM with macro-economic shocks. Results suggest that there exists a dominant role for US macroeconomic disturbances for international capital markets. Integrating macro-economic disturbances more fully into the CAPM may provide theory-consistent models which do not rely solely upon time-series representations of time-varying return variances and covariances such as ARCH.

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  • Andrew Clare & Raymond O'Brien & Peter Smith & Stephen Thomas, 1996. "Global macroeconomic shocks, time-varying covariances and tests of the international CAPM," Applied Economics Letters, Taylor & Francis Journals, vol. 3(2), pages 109-113.
    • Handle: RePEc:taf:apeclt:v:3:y:1996:i:2:p:109-113
    DOI: 10.1080/135048596356816
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    References listed on IDEAS

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    1. Charles Engel, Jeffrey A. Frankel, Kenneth A. Froot, and Anthony Rodrigues., 1990. "The Constrained Asset Share Estimation (CASE) Method: Testing Mean-Variance Efficiency of the U.S. Stock Market," Economics Working Papers 90-134, University of California at Berkeley.
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    Cited by:

    1. Charles M. Engel, 1994. "Tests of CAPM on an International Portfolio of Bonds and Stocks," NBER Chapters, in: The Internationalization of Equity Markets, pages 149-183, National Bureau of Economic Research, Inc.
    2. Azamat Abdymomunov & James Morley, 2011. "Time variation of CAPM betas across market volatility regimes," Applied Financial Economics, Taylor & Francis Journals, vol. 21(19), pages 1463-1478.

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