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Multi-regime nonlinear capital asset pricing models

Author

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  • Cathy W. S. Chen
  • Richard H. Gerlach
  • Ann M. H. Lin

Abstract

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.

Suggested Citation

  • Cathy W. S. Chen & Richard H. Gerlach & Ann M. H. Lin, 2011. "Multi-regime nonlinear capital asset pricing models," Quantitative Finance, Taylor & Francis Journals, vol. 11(9), pages 1421-1438, April.
    • Handle: RePEc:taf:quantf:v:11:y:2011:i:9:p:1421-1438
    DOI: 10.1080/14697680902968013
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    1. Arısoy, Yakup Eser & Altay-Salih, Aslıhan & Akdeniz, Levent, 2015. "Aggregate volatility expectations and threshold CAPM," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 231-253.
    2. Cathy W. S. Chen & Muyi Li & Nga T. H. Nguyen & Songsak Sriboonchitta, 2017. "On Asymmetric Market Model with Heteroskedasticity and Quantile Regression," Computational Economics, Springer;Society for Computational Economics, vol. 49(1), pages 155-174, January.
    3. Cathy W. S. Chen & Mike K. P. So & Thomas C. Chiang, 2016. "Evidence of Stock Returns and Abnormal Trading Volume: A Threshold Quantile Regression Approach," The Japanese Economic Review, Springer, vol. 67(1), pages 96-124, March.
    4. Wang, Kai Y.K. & Chen, Cathy W.S. & So, Mike K.P., 2023. "Quantile three-factor model with heteroskedasticity, skewness, and leptokurtosis," Computational Statistics & Data Analysis, Elsevier, vol. 182(C).
    5. Cathy Chen & Simon Lin & Philip Yu, 2012. "Smooth Transition Quantile Capital Asset Pricing Models with Heteroscedasticity," Computational Economics, Springer;Society for Computational Economics, vol. 40(1), pages 19-48, June.
    6. Hu, May & Muhammad, Abdul & Yang, Jingjing, 2022. "Ownership concentration, modified audit opinion, and auditor switch: New evidence and method," The North American Journal of Economics and Finance, Elsevier, vol. 61(C).

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