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Studies in Nonlinear Dynamics & Econometrics

Ed. by Mizrach, Bruce

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Volume 6, Issue 4 (Mar 2003)


Time-Varying Betas Help in Asset Pricing: The Threshold CAPM

Levent Akdeniz
  • 1Bilkent University, Graduate School of Business,
/ Aslihan Altay-Salih
  • 2Bilkent University, Graduate School of Business,
/ Mehmet Caner
  • 3University of Pittsburgh, Department of Economics,
Published Online: 2003-03-11 | DOI: https://doi.org/10.2202/1558-3708.1101

Although there is a consensus about time variation in market betas, it is not clear how this variation should be captured. Several researchers continue to analyze different versions of the conditional CAPM. However, Ghysels (1998) shows that these conditional CAPM models fail to capture the dynamics of beta risk. In this study, we introduce a new model, threshold CAPM, which outperforms both the conditional and unconditional CAPMs by generating smaller pricing errors. We also show that the beta risk changes through time with the changes in the economic environment and the dynamics of time variation of beta differ across industries. These findings have important implications for asset allocation, portfolio selection, and hedging decisions.

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Published Online: 2003-03-11

Citation Information: Studies in Nonlinear Dynamics & Econometrics, ISSN (Online) 1558-3708, DOI: https://doi.org/10.2202/1558-3708.1101. Export Citation

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