Abstract
Abrupt and profound swings in economic activity can result in changes in systematic component of risk premia of capital market assets. This can translate into adjustments in risk perception by the market agents, which may lead to significant changes in real investment development. We examine the issue of time-varying systematic risk on a micro level using the capital asset pricing model in an intertemporal setting. We formulate the hypothesis within a bivariate GARCH-in-mean model, which enables us to estimate the time-varying variances and covariances of the respective assets and market returns and thus the time-varying sensitivity to systematic risk. The results of the paper show that the reaction of assets’ sensitivity to systematic risk varies across the sample and the changes were rather temporary. Based on the results, the downturn in economic activity witnessed in 2008 – 2009 should not be a drag on real investment.
Highlights
Modern financial economic theory focuses primarily on assessing riskiness of various kinds of assets
The paper presents an estimation of time-varying sensitivities to systematic risk as captured by the beta coefficient in the standard capital asset pricing model (CAPM) framework
Higher sensitivity to systematic risk may translate into higher systematic risk as a whole and Journal of Business Economics and Management, 2013, 14(Supplement 1): S36–S55 increase the cost of capital or/and limit the funds available to firms for investment
Summary
Modern financial economic theory focuses primarily on assessing riskiness of various kinds of assets. Higher sensitivity to systematic risk (higher CAPM beta) may translate into higher systematic risk as a whole and Journal of Business Economics and Management, 2013, 14(Supplement 1): S36–S55 increase the cost of capital or/and limit the funds available to firms for investment. Part of this is implied by the Tobin’s Q-theory, Hayashi (1982), and is reflected in the production-based asset pricing theory, Cochrane (1991) and Cochrane (1996). We are not able to explicitly test such a channel due to data limitations as will be apparent later in the paper
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