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An international CAPM for bonds and equities

Thomas, S.H. and Wickens, M.R. (1993) An international CAPM for bonds and equities Journal of International Money and Finance, 12, (4), pp. 390-412. (doi:10.1016/0261-5606(93)90003-T).

Record type: Article

Abstract

Previous empirical studies of international CAPM models have not found much supporting evidence. In this paper we suggest reasons why this might have happened and perform new tests using improved models and data. A range of monthly CAPM models are estimated for 1973-1987 for aggregate equities and bonds in Germany, Japan, the US and UK. The models are an improvement on earlier work in that we integrate equity markets into the analysis instead of focusing exclusively on government bond stocks, and we carefully measure the rates of return for both bonds and equities. In particular, bond returns reflect changes in the price of bonds as well as coupons. Despite this wider portfolio and the introduction of ARCH effects in the conditional covariance matrix of errors, our model still yields unlikely estimates of the coefficient of relative risk aversion and provides very little explanatory power for expected relative rates of return. Correcting the ICAPM for these major deficiencies does not reverse earlier conclusions in the literature. A close examination of the residuals of the estimated equations suggests that GARCH models are not required for our new data set.

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More information

Published date: August 1993
Keywords: mean variance efficiency, time-varying covariances, exchange rate, market portfolio, pricing theory, risk premia, tests, exclusion, assets, model

Identifiers

Local EPrints ID: 37387
URI: http://eprints.soton.ac.uk/id/eprint/37387
ISSN: 0261-5606
PURE UUID: 456f3856-055b-4d67-9c25-23bf5c38c186

Catalogue record

Date deposited: 02 Jul 2007
Last modified: 17 Jul 2017 15:42

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Contributors

Author: S.H. Thomas
Author: M.R. Wickens

University divisions

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