Macroeconomic shocks and the domestic CAPM: evidence from the UK stockmarket


Clare, Andrew, O'Brien, Raymond, Thomas, Stephen and Wickens, Michael (1998) Macroeconomic shocks and the domestic CAPM: evidence from the UK stockmarket. International Journal of Finance and Economics, 3, (2), 111-126.

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Description/Abstract

The UK stockmarket is tested for mean variance efficiency (MVE) in the sense that sectoral stock returns satisfy the restrictions implied by CAPM. There are two main innovations in the paper. One is the use of a model for excess returns in which the conditional covariance matrix of returns varies over time due to the simultaneous influence of four macroeconomic shocks. The other is the use of a likelihood ratio test for MVE calculated from analytical derivatives of the likelihood function in order to reduce the computational burden of these high parameter dimensional models. The model with macroeconomic shocks is compared with the multivariate ARCH-in-mean model. Although the macroeconomic shocks model is found to perform slightly better than the ARCH model, and both produce a significant and plausible estimate of the coefficient of risk aversion, the null hypothesis that the UK stockmarket is mean variance efficient is rejected for both models in favour of the alternative hypothesis that equity returns are an unrestricted linear function of asset shares. Another important finding is that the most important shocks affecting the UK stockmarket either have an international origin or are due to the bond market

Item Type: Article
Additional Information:
ISSNs: 1076-9307 (print)
Related URLs:
Keywords: capm, arch, macroeconomic shocks, mean variance efficiency
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HB Economic Theory
Divisions: University Structure - Pre August 2011 > School of Management
ePrint ID: 37373
Date Deposited: 27 Apr 2007
Last Modified: 27 Mar 2014 18:23
Contact Email Address: mrw4@york.ac.uk
URI: http://eprints.soton.ac.uk/id/eprint/37373

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