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A CONDITIONAL CAPM; IMPLICATIONS FOR THE ESTIMATION OF SYSTEMATIC RISK

 

Alexandros E. Milionis

Bank of Greece and University of the Aegean

 

Dimitra K. Patsouri

University of Athens

 

Abstract

The purpose of this paper is to examine: (i) whether or not, the residuals of the Market Model are conditionally heteroscedastic; (ii) whether or not, there exists an intervalling effect in conditional heteroscedasticity in the residuals of the Market Model; (iii) the effect of conditional heteroscedasticity on the estimation of systematic risk.; as well as to propose a simple data driven conditional CAPM. To this end daily closing price of stocks traded at the Athens Stock Exchange are used. Empirical evidence is provided for the existence of: (a) conditional heteroscedasticity in MM residuals; (b) a pronounced intervalling effect on ARCH in MM residuals; (c) GARCH in mean type of conditional heteroscedasticity for the majority of cases where ARCH was present in MM residuals. These findings in terms of theory are conducive to a conditional CAPM, which takes into account the effect of conditional variance on expected returns, rather than the standard CAPM. Furthermore, in terms of practical implications these findings may lead to better estimates of systematic risk

 

Keywords: Conditional Capital Asset Pricing Model, Market Model, Conditional Volatility, Systematic Risk, Intervalling Effect, Athens Stock Exchange.

JEL Classification: C10, G10, G11, G12, G32

 

 

Correspondence:

Alexandros E. Milionis

Bank of Greece,

Department of Statistics

21 E. Venizelos Avenue,

 Athens, GR 102 50

Tel.: +30-210 3203855,

e-mail: amilionis@bankofgreece.gr


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