Journal of Statistical and Econometric Methods

International CAPM, Dynamic Betas and Optimization of Portfolios: Are countries-risk more profitable?

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  • Abstract

    The paper proposes to check the relationship between risk and return in international spot markets. This subject will be made using time varying betas estimation, original from theoretical structure of portfolio selection, which will be analyze the time evolution of non diversifiable risk among countries. The sample is composed by 14 countries, among developed and emerging ones. The sample period is from January 2002 to August 2015. We computed the dollar excess return for each country index as well as for the MSCI world index, which is proxy to market return. The risk free rate was a Treasury 30 years. Starting from the theoretical support of International CAPM (ICAPM), we estimated multivariated GARCH (MGARCH) models described in Tse and Tsui(2002), which are able to estimate conditional variances and covariances. They are extensions of the models of Bollerslev et al.(1988), Bollerslev, Engle,and Wooldridge and the model of Engle and Kroner(1995). All emerging markets, except Chile, had a beta higher than 1 as compared with developed countries. The research found that ICAPM is not valid in the context of international stock market, in other words, in average, the country with highr risk is not the country with expected excess return.

    JEL Classification: F21; F30
    Keywords: International CAPM; Dynamic Betas; International portfolio