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

Global macroeconomic shocks, time-varying covariances and tests of the international CAPM
Global macroeconomic shocks, time-varying covariances and tests of the international CAPM
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. Although 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.
1350-4851
109-113
Clare, A.
a98c3503-c9fe-433f-8092-1d68c80f876c
O'Brien, R.
bfc31021-cd61-45c0-b02b-3f013e1bd34d
Smith, P.N.
64a3e36c-48ef-439a-bf59-28464b6f4d6e
Thomas, S.
0f83004b-179e-4b71-8374-25345d0e9dad
Clare, A.
a98c3503-c9fe-433f-8092-1d68c80f876c
O'Brien, R.
bfc31021-cd61-45c0-b02b-3f013e1bd34d
Smith, P.N.
64a3e36c-48ef-439a-bf59-28464b6f4d6e
Thomas, S.
0f83004b-179e-4b71-8374-25345d0e9dad

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 Economics Letters, 3 (2), 109-113. (doi:10.1080/135048596356816).

Record type: Article

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. Although 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.

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Published date: 1996

Identifiers

Local EPrints ID: 37380
URI: http://eprints.soton.ac.uk/id/eprint/37380
ISSN: 1350-4851
PURE UUID: 5b1d0caa-b31f-4cc3-ac79-9bf48e84b861

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Date deposited: 09 Feb 2007
Last modified: 15 Mar 2024 07:58

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Contributors

Author: A. Clare
Author: R. O'Brien
Author: P.N. Smith
Author: S. Thomas

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