Abstract
In this paper, the interval approach for Markov switching capital asset pricing model (MS-CAPM) is proposed to quantify the beta risk in two different regimes, namely a bull and a bear regimes. Instead of fitting a MS-CAPM on specific fixed reference points, such as midpoints (center method), and lower and upper bounds (MinMax method), this study suggests choosing the reference points that better represent the intervals of excess stock return and excess market return. Therefore, the convex combination (CC) method is introduced to fit the interval MS-CAPM. The proposed interval MS-CAPM performance based on the CC method is assessed and compared with the center method and the MinMax method through a simulation study and two application studies.
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Acknowledgments
We would like to express our gratitude to two anonymous reviewers, who offered precious suggestions for improvements. The authors are grateful to the Centre of Excellence in Econometrics, Chiang Mai University, for financial support.
Funding
This study is funded by the Center of Excellence in Econometrics, Faculty of Economics, Chiang Mai University (Grant Number: R000023389).
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Communicated by Vladik Kreinovich.
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Yamaka, W., Phadkantha, R. A convex combination approach for Markov switching CAPM of interval data. Soft Comput 25, 7839–7851 (2021). https://doi.org/10.1007/s00500-021-05798-y
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DOI: https://doi.org/10.1007/s00500-021-05798-y