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Massimo Guidolin, Manchester Print
Thursday, 13 November 2008, 12:15 - 13:15

Regime Shifts in Empirical Pricing Kernels: A Mixture CAPM

Abstract : A mixture Capital Asset Pricing Model (CAPM) is defined as an asset pricing model in which different component CAPMs may apply at different points in time, according to the realization of one underlying variable describing the state of the economy and/or the way in which investors measure and price market risk. In this paper, we investigate whether a Markov switching mixture CAPM, as defined by
a regime switching empirical pricing kernel, is able to solve size, value and momentum anomalies
brought to light by the cross-sectional asset pricing literature. We find that particular version of
Markov switching mixture CAPMs in which second moments are also allowed to depend on the underlying, unobservable regime are able to reduce (in economic terms) and make statistically insignificant the alphas (abnormal rates of returns) associated with size-, value, and momentum-sorted NYSE/AMEX/NASDAQ stock portfolios. The resulting asset pricing regimes are persistent and are easy to interpret. These findings are robust to specifying multivariate models that include multiple spread portfolios. There is also evidence that Markov switching CAPMs provide superior one-month ahead predictive performance than standard CAPMs.

Massimo Guidolin, University of Manchester

Location: S 12.227
Contact: Claude Adan, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it