Abstract
In this study, a conditional version of the international CAPM for Asian markets is tested using a parsimonious generalized autoregressive conditional heteroskedasticity (GARCH) model in which the risk premia, betas and correlations vary through time. The results show that unlike the static CAPM, the time-varying CAPM prices market risk. Cross-country correlations increase toward the Asian crisis in mid 1997. The price of covariance risk appears to be higher for emerging markets than the industrialized markets The impulse response functions of the time-varying price of covariance variables from the VAR model estimations show that movements in the price of covariance risk belonging to the U.S. or an Asian emerging market can be contagious with varying degrees of strength in the region.
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