TY - JOUR
AU - Engel,Charles
AU - Rodrigues,Anthony P.
TI - Tests of International CAPM with Time-Varying Covariances
JF - National Bureau of Economic Research Working Paper Series
VL - No. 2303
PY - 1987
Y2 - July 1987
DO - 10.3386/w2303
UR - http://www.nber.org/papers/w2303
L1 - http://www.nber.org/papers/w2303.pdf
N1 - Author contact info:
Charles Engel
Department of Economics
University of Wisconsin
1180 Observatory Drive
Madison, WI 53706-1393
Tel:
Fax:
E-Mail: cengel@ssc.wisc.edu
Anthony P. Rodrigues
Federal Reserve Bank of New York
AB - We perform maximum likelihood estimation of a model of international asset pricing based on CAPM. We test the restrictions imposed by CAPM against a more general asset pricing model. The "betas" in our CAPM vary over time from two sources -- the supplies of the assets (government obligations of France, Germany, Italy, Japan, the U.K. and the U.S.) change over time, and so do the conditional covariances of returns on these assets. We let the covariances change over time as a function of macroeconomic data. We also estimate the model when the covariances follow a multivariate ARCH process. When the covariance of forecast errors are time-varying, we can identify a modified CAFM model with measurement error -- which we also estimate. We find that the model in which the CAPM restrictions are imposed (which involve cross-equation constraints between coefficients and the variances of the residuals) perform much better when variances are not constant over time. Nonetheless, the CAPM model is rejected in favor of the less restricted model of asset pricing.
ER -