Applying exogenous variables and regime switching to multifactor models on equity indices
PBN-AR
Instytucja
Wydział Nauk Ekonomicznych (Uniwersytet Warszawski)
Informacje podstawowe
Główny język publikacji
en
Czasopismo
Ekonomia. Rynek, gospodarka, społeczeństwo
ISSN
0137-3056
EISSN
Wydawca
Wydział Nauk Ekonomicznych Uniwersytetu Warszawskiego
DOI
Rok publikacji
2016
Numer zeszytu
Strony od-do
79-121
Numer tomu
47
Identyfikator DOI
Liczba arkuszy
Autorzy
Słowa kluczowe
en
investment algorithms
multi-factor models
Markov switching model
asset pricing models
equity risk premia
risk factors
Markowitz model
Streszczenia
Język
en
Treść
This article aims to extend the evaluation of classic multifactor models of Carhart (1997) for the case of global equity indices and to expand analysis performed in Sakowski, Slepaczuk, and Wywial (2015). Our intention is to test several modifications of these models to take into account different dynamics of equity excess returns between emerg-ing and developed equity indices. Proposed extensions include volatility regime switch-ing mechanism (using dummy variables and the Markov approach) and three new risk factors based on realized volatility of index returns, percentage deviation from nominal GDP trend and capitalisation relative to GDP factor. Additional modifications include introduction of common and country specific variables in order to control for global risk where fluctuations of volatility of various assets, prices of commodities, currencies and rates is really important. Moreover, instead of using data for individual stocks (which is a common approach in the literature), we evaluate the performance of these models for weekly data of 81 world investable equity indices in the period of 2000-2015. Such approach is proposed to estimate equity risk premium for a single country. Empirical evidence from the first part reveals important differences between results for classical models estimated on single stocks (either in international or US-only frame-work) and models evaluated for equity indices. Additionally, we observe substantial discrepancies between results for developed countries and emerging markets. The last part of this research helps us to understand results revealed in the first part. Thanks to introduction of new risk factors, and additional common and country specific variables we were able to increase explanatory power of our factor models especially in case of emerging market indices. Finally, using weekly data for the last 15 years we illustrate importance of model risk and data overfitting effects when drawing conclusions upon results of multifactor models.
Cechy publikacji
Ekonomia
Finanse
Economics
Finance
Original article
Oryginalny artykuł naukowy
Inne
System-identifier
PBN-R:791694