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Conditional betas and the price of risk in a thin asset market: A sensitivity analysis

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  • Malkamäki, Markku

Abstract

This paper examines the sensitivity of tests of the Sharpe-Lintner Capital Asset Pricing Model (CAPM) to different estimation methods and asset return samples in a thin European asset market, i.e. the Finnish asset market. A time-varying-parameter model is introduced as an altemative to the static market model. We run a regression over a pooled data set in addition to the second-pass Fama-McBeth regressions. Our tests are carried out with four asset specific samples. In every case, cross-sectional OLS estimation of the betas leads to the rejection of the mean-variance efficiency of the market index. The price of market risk is statistically significant, but negative. Our tests on the time-varying betas indicate just the opposite. We are. not able to reject the mean-variance efficiency of the market index in any of the samples. The price of market risk is positive and statistically significant for the stock return data set that most closely resemble the normal distribution.

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  • Malkamäki, Markku, 1992. "Conditional betas and the price of risk in a thin asset market: A sensitivity analysis," Bank of Finland Research Discussion Papers 9/1992, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp1992_009
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    1. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-131, February.
    2. Bodurtha, James N, Jr & Mark, Nelson C, 1991. "Testing the CAPM with Time-Varying Risks and Returns," Journal of Finance, American Finance Association, vol. 46(4), pages 1485-1505, September.
    3. Berglund, Tom & Liljeblom, Eva & Loflund, Anders, 1989. "Estimating betas on daily data for a small stock market," Journal of Banking & Finance, Elsevier, vol. 13(1), pages 41-64, March.
    4. Harvey, Campbell R., 1989. "Time-varying conditional covariances in tests of asset pricing models," Journal of Financial Economics, Elsevier, vol. 24(2), pages 289-317.
    5. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    6. Teppo Martikainen, 1991. "The impact of infrequent trading on betas based on daily, weekly and monthly return intervals : empirical evidence with Finnish data," Finnish Economic Papers, Finnish Economic Association, vol. 4(1), pages 52-64, Spring.
    7. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    8. Ng, Lilian, 1991. "Tests of the CAPM with Time-Varying Covariances: A Multivariate GARCH Approach," Journal of Finance, American Finance Association, vol. 46(4), pages 1507-1521, September.
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