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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 & Economics, 3, (2), pp. 111-126.

Record type: Article

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

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More information

Published date: 1998
Keywords: capm, arch, macroeconomic shocks, mean variance efficiency

Identifiers

Local EPrints ID: 37373
URI: http://eprints.soton.ac.uk/id/eprint/37373
PURE UUID: e081bcb9-67e6-4f49-94fe-1f699ce8ab83

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Date deposited: 27 Apr 2007
Last modified: 12 Sep 2017 16:32

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Contributors

Author: Andrew Clare
Author: Raymond O'Brien
Author: Stephen Thomas
Author: Michael Wickens

University divisions

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