Premium
A Dynamic and Stochastic Beta and Its Implications in Global Capital Markets[Note 1. We would like to thank two anonymous referees, Benn ...]
Author(s) -
Lin HongJen,
Lin Winston T.
Publication year - 2000
Publication title -
international finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 39
eISSN - 1468-2362
pISSN - 1367-0271
DOI - 10.1111/1468-2362.00044
Subject(s) - economics , capital asset pricing model , stock exchange , financial economics , stock (firearms) , econometrics , portfolio , beta (programming language) , stock market , capital market , finance , mechanical engineering , paleontology , horse , computer science , engineering , biology , programming language
This article investigates the dynamic and stochastic behaviour of the beta coefficient of the one‐factor international capital asset pricing model (ICAPM), and its implications for the pricing of stock markets at the country level and the forecasting of stock returns in global stock markets. We apply several novel econometric techniques and conduct necessary statistical tests. We find that the ICAPM has a stochastic and dynamic beta coefficient and that the global stock market is efficient and integrated, and the world market portfolio is mean‐variance efficient. We demonstrate that the dynamic and stochastic behaviour of country betas for the developed countries differs from that of developing economies. The empirical results indicate that the trend and the unexpected change of the foreign exchange rate contribute significantly to the variation patterns of country betas, and that explicit consideration of such changing characteristics will serve to increase the accuracy of stock return forecasts in global stock markets.