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Improving the Market Model: The 4-State Model Alternative

Author

Listed:
  • Octave JOKUNG

    (Edhec Business School)

  • Jean-Christophe MEYFREDI

    (Edhec Business School)

Abstract

The present paper conducts an empirical study by examining the Market Model and the three versions of the 4-State Model (translated, rotated and un-rotated) in a mean-beta framework. Using daily returns from the CAC 40 Index's assets, we find that the explanatory power of the 4-State Model is greater than the one of the Market Model and this effect is improved by rotation. A reduction in the non-systematic risk is also observed when switching from Market Model to 4-State Models. Surprisingly, the betas are more stable when using any version of the 4- State Model. This could have a strong impact on portfolio diversification and call widely held opinion into question.

Suggested Citation

  • Octave JOKUNG & Jean-Christophe MEYFREDI, 2004. "Improving the Market Model: The 4-State Model Alternative," Finance 0403006, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0403006
    Note: Type of Document - pdf; pages: 24
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0403/0403006.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Market Model; Arch;

    JEL classification:

    • G - Financial Economics

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