TY - JOUR
T1 - Modeling the risk and return relation conditional on market volatility and market conditions
AU - Galagedera, Don U.A.
AU - Faff, Robert
PY - 2005
Y1 - 2005
N2 - This paper investigates whether the risk-return relation varies, depending on changing market volatility and up/down market conditions. Three market regimes based on the level of conditional volatility of market returns are specified -"low", "neutral" and "high". The market model is extended to allow for these three market regimes and a three-beta asset-pricing model is developed. For a set of US industry sector indices using a cross-sectional regression, we find that the beta risk premium in the three market volatility regimes is priced. These significant results are uncovered only in the pricing model that accommodates up/down market conditions.
AB - This paper investigates whether the risk-return relation varies, depending on changing market volatility and up/down market conditions. Three market regimes based on the level of conditional volatility of market returns are specified -"low", "neutral" and "high". The market model is extended to allow for these three market regimes and a three-beta asset-pricing model is developed. For a set of US industry sector indices using a cross-sectional regression, we find that the beta risk premium in the three market volatility regimes is priced. These significant results are uncovered only in the pricing model that accommodates up/down market conditions.
UR - http://www.scopus.com/inward/record.url?scp=23244436381&partnerID=8YFLogxK
U2 - 10.1142/S0219024905002901
DO - 10.1142/S0219024905002901
M3 - Article
AN - SCOPUS:23244436381
SN - 0219-0249
VL - 8
SP - 75
EP - 95
JO - International Journal of Theoretical and Applied Finance
JF - International Journal of Theoretical and Applied Finance
IS - 1
ER -