Does Time-Varying Beta Improve Asset Pricing? Evidence from TSE

Document Type : applied

Authors

1 PhD. Candidate, Banking Finance, Faculty of Management, University of Tehran, Iran

2 MSc, Financial Engineering, Faculty of Management, University of Tehran, Iran

Abstract

Capital asset pricing model (CAPM) has been among the common models to estimate expected rate of return. Single-period standard capital asset pricing model assumes that investors have homogeneous expectations regarding return, risk and covariance of assets, therefore, the coefficient beta is constant. Because of changes in economic conditions, it is possible to revolve trade-off of investors in terms of return and risk in financial markets and beta was time-varying. Hence, threshold model has been used to estimate time-varying beta.Therefore, in this study, predictive power of the threshold CAPM and standard CAPM in Tehran Stock Exchange in the period from 2006 to 2015 has been tested. For this purpose, expected returns has estimated with regard to two abovementioned models during period of the study and the results have compared with realized returns. Mean absolute percentage error and especially Diebold-Mariano test are used to measure predictive power of the models. The results indicate that using threshold capital asset pricing model significantlyincreases predictive power of realized returns.
JEL: C22, G12
How to cite this paper: Asima, M., & Ali Abbaszadeh Asl, A. (2017). Does Time-Varying Beta Improve Asset Pricing? Evidence from TSE. Quarterly Journal of Risk Modeling and Financial Engineering, 2(2), 263–277. (In Persian)

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