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Time variation of CAPM betas across market volatility regimes

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  • Azamat Abdymomunov
  • James Morley
Abstract
We investigate time variation in Captial Asset Pricing Model (CAPM) betas for Book-to-Market (B/M) and momentum portfolios across stock market volatility regimes. For our analysis, we jointly model market and portfolio returns using a two-state Markov-switching process, with beta and the market risk premium allowed to vary between 'low' and 'high' volatility regimes. Our empirical findings suggest strong evidence of time variation in betas across volatility regimes in almost all the cases for which the unconditional CAPM can be rejected. Although the regime-switching conditional CAPM can still be rejected in many cases, the time-varying betas help explain portfolio returns much better than the unconditional CAPM, especially when market volatility is high.

Suggested Citation

  • Azamat Abdymomunov & James Morley, 2011. "Time variation of CAPM betas across market volatility regimes," Applied Financial Economics, Taylor & Francis Journals, vol. 21(19), pages 1463-1478.
    • Handle: RePEc:taf:apfiec:v:21:y:2011:i:19:p:1463-1478
    DOI: 10.1080/09603107.2011.577010
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    9. Bingxin Li & Natalia Piqueira, 2019. "State-dependent size and value premium: evidence from a regime-switching asset pricing model," Journal of Asset Management, Palgrave Macmillan, vol. 20(3), pages 229-249, May.
    10. Nelson Areal & Maria Cortez & Florinda Silva, 2013. "The conditional performance of US mutual funds over different market regimes: do different types of ethical screens matter?," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 27(4), pages 397-429, December.
    11. Amélie Charles & Olivier Darné & Zakaria Moussa, 2014. "The sensitivity of Fama-French factors to economic uncertainty," Working Papers hal-01015702, HAL.
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