Global macroeconomic shocks, time-varying covariances and tests of the international CAPM


Clare, A., O'Brien, R., Smith, P.N. and Thomas, S. (1996) Global macroeconomic shocks, time-varying covariances and tests of the international CAPM. Applied Economic Letters, 3, (2), 109-113. (doi:10.1080/135048596356816).

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Original Publication URL: http://dx.doi.org/10.1080/135048596356816

Description/Abstract

The mean variance efficiency (MVE) of a portfolio of international bonds and equities is tested using a CAPM model of excess returns. The conditional variances and covariances of the portfolio returns are allowed to time-vary according to shocks in up to three global macro-economic variables simultaneously. Athough the hypothesis of MVE is easily rejected within a static version of the CAPM this is not the case at conventional significance levels in the CAPM with macro-economic shocks. Results suggest that there exists a dominant role for US macroeconomic disturbances for international capital markets. Integrating macro-economic disturbances more fully into the CAPM may provide theory-consistent models which do not rely solely upon time-series representations of time-varying return variances and covariances such as ARCH.

Item Type: Article
Related URLs:
Subjects: H Social Sciences > HB Economic Theory
Divisions: University Structure - Pre August 2011 > School of Social Sciences > Economics
University Structure - Pre August 2011 > School of Management
ePrint ID: 37380
Date Deposited: 09 Feb 2007
Last Modified: 27 Mar 2014 18:23
URI: http://eprints.soton.ac.uk/id/eprint/37380

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