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Testing CAPM using Markov switching model: the case of coal firms

Korkmaz, Turhan and Cevik, Emrah Ismail and Birkan, Elif and Özataç, Nesrin (2010): Testing CAPM using Markov switching model: the case of coal firms. Published in: Economic Research-Ekonomska Istraživanja , Vol. 23, No. 2 (2010): pp. 44-59.

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Abstract

In this study, the relation between the coal firms that are traded in New York Stock Exchange and S&P500 index is analyzed. The return of the coal firms and the market return are analyzed by using traditional CAPM and two-state Markov regime switching CAPM (MS-CAPM). According to the Likelihood Ratio test, two-state regime MS-CAPM gives better results and indicates a non-linear relation between return and risk. It is found that beta shows variability in regard to low and high volatile periods making linear CAPM to provide deviated results.

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