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.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Coal Firms, CAPM, Markov Switching Model
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

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