Abstract
Introduction. This paper aims to assess time variability of beta coefficients (systematic risk) of Capital Asset Pricing Model (CAPM) using data from five key sectors in Saudi Arabia and Kuwait stock markets. Material and methods. To assess time – varying systematic risk we employed symmetric as well as asymmetric conditional volatility specifications to account for skewness and leptkurtosis of high frequency financial time series to better specify conditional higher moments. Results & discussions. The results of the paper support significant evidence of time-varying beta coefficients for all sectors included in the study, in particular the banking sector, and relatively with a lesser degree ,the food, and the service sectors in both countries. For the banking sector in Saudi Arabia, the beta coefficients variability during the sample period estimated between (0.18 to 22.1), and also for Kuwait stock market the beta coefficient of the banking sector variability estimated between (0.16 to 22.1). This result invalidates, at least in the context of the sample country’s banking sectors, the standard application of (CAPM) that assumes constant beta coefficients. Also indicated in the paper, time-varying beta estimates are consistent with a modified version of CAPM prediction that is portfolios with wider range of beta variations expected to yield higher return values and those with lower range of beta variations yield lower returns. Conclusion. In this new context, risk is no longer is a point estimate as implied by the standard CAPM model, but it is a range of values. Our findings also show the size and the range of beta variations are sensitive to skewness and fat tailedness that characterize asset returns distribution.
Highlights
This paper aims to assess time variability of beta coefficients of Capital Asset Pricing Model (CAPM) using data from five key sectors in Saudi Arabia and Kuwait stock markets
Risk is no longer is a point estimate as implied by the standard CAPM model, but it is a range of values
Our findings show the size and the range of beta variations are sensitive to skewness and fat tailedness that characterize asset returns distribution
Summary
This paper aims to assess time variability of beta coefficients (systematic risk) of Capital Asset Pricing Model (CAPM) using data from five key sectors in Saudi Arabia and Kuwait stock markets. Some important regularities for asset returns volatility include the socalled “volatility clustering” phenomena which refers to the situation of large change of asset returns followed by large change of either sign, and small changes followed by small changes. Another related phenomena is the “leverage effect” which refers to the different response of volatility to bad news as compared to good news. To account for these type of asymmetric effect of news on traded asset returns’ volatility in this paper Glosten, Jagannathan, and Runkle [11] specification of GARCH model is adopted. GJR-GARCH specification separates the effect of negative news on volatility from that of positive news
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