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Testing CAPM using Markov switching model: the case of coal firms

Author

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  • Korkmaz, Turhan
  • Cevik, Emrah Ismail
  • Birkan, Elif
  • Özataç, Nesrin

Abstract

In this study, the relation between the coal firms that are traded in New York Stock Exchange and S&P500 index is analyzed. The return of the coal firms and the market return are analyzed by using traditional CAPM and two-state Markov regime switching CAPM (MS-CAPM). According to the Likelihood Ratio test, two-state regime MS-CAPM gives better results and indicates a non-linear relation between return and risk. It is found that beta shows variability in regard to low and high volatile periods making linear CAPM to provide deviated results.

Suggested Citation

  • Korkmaz, Turhan & Cevik, Emrah Ismail & Birkan, Elif & Özataç, Nesrin, 2010. "Testing CAPM using Markov switching model: the case of coal firms," MPRA Paper 71479, University Library of Munich, Germany, revised 2010.
    • Handle: RePEc:pra:mprapa:71479
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    More about this item

    Keywords

    Coal Firms; CAPM; Markov Switching Model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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