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A0319
Title: A dynamic conditional regime-switching GARCH CAPM for energy and financial markets Authors:  Christian Urom - Universite' Paris VIII Vincennes Saint Denis (France) [presenting]
Julien Chevallier - IPAG Business School (France)
Abstract: A methodology is developed for estimating a time-varying conditional version of the CAPM with regime changes in conditional variance dynamics. The goal is related to documenting the power of the beta when it is estimated dynamically. The conditional regime-switching GARCH CAPM, with time-varying betas explaining both bull and bear markets, outperforms the unconditional(static) CAPM. Among stocks, there are significant time variations in betas across our models and regimes. This empirical feature is even more pronounced in the USA, the UK, Germany, France, China, and Malaysia. Among energy and other commodities, we find similar variations in the market price of risk. The direction of the relation with market returns for Crude Oil, Gold, Copper, Tin, Rubber, Aluminum, and Platinum is the same across our nested models. This result also holds for aggregate markets indices. Secondly, we provide a ranking by mean filtered volatility series where Natural Gas stands out at a high level. Average pricing errors are inferior in the case of the conditional model, and for Crude Oil. Lastly, we demonstrate that the regime switching model delivers better estimates of one-day-ahead Value-at-Risk than its non-switching counterpart. Taken together, our results help shed light on the supremacy of the market factor alone associated with time variation in risk premia across energy and financial markets.