Goodness-of-Fit versus Significance: A CAPM Selection with Dynamic Betas Applied to the Brazilian Stock Market

Abstract

Abstract:In this work, a Capital Asset Pricing Model (CAPM) with time-varying betas is considered. These betas evolve over time, conditional on financial and non-financial variables. Indeed, the model proposed by Adrian and Franzoni (2009) is adapted to assess the behavior of some selected Brazilian equities. For each equity, several models are fitted, and the best model is chosen based on goodness-of-fit tests and parameters significance. Finally, using the selected dynamic models, VaR (Value-at-Risk) measures are calculated. We can conclude that CAPM with time-varying betas provide less conservative VaR measures than those based on CAPM with static betas or historical VaR.

Mathematical Finance with Applications

“…Some researchers conducted modification on the basic model with specific structure. Ronzani et al (2017) suggested that β (systematic risk) evolves over time and the model with time-varying β provide less In Model 2, the momentum factor and turnover factor are added into the model. We developed an innovative method to study each single stock in the market, in order to find out the general pattern of the stock market.…”

Examination and Modification of Multi-Factor Model in Explaining Stock Excess Return with Hybrid Approach in Empirical Study of Chinese Stock Market

“…Some researchers conducted modification on the basic model with specific structure. Ronzani et al (2017) suggested that β (systematic risk) evolves over time and the model with time-varying β provide less conservative VaR measures than the static β. While Cisse et al (2019) examined the dynamics of the model with Kalman filter and Markov switching (MS) model and proved that the former method fits better in the model.…”