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