The CAPM, National Stock Market Betas, and Macroeconomic Covariates: a Global Analysis
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The CAPM, National Stock Market Betas, and Macroeconomic Covariates: a Global Analysis Michael Curran1 · Adnan Velic2 © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract Using global data on aggregate stock markets, this paper finds that the capital asset pricing model fares much better than suggested previously. At shorter time horizons, our results also show that the positive risk-reward relation can collapse during times of high volatility. Compared to other countries, we retrieve evidence of lower systematic risks across frontier equity portfolios. We find that countries characterized by higher levels of openness, exchange rate volatility, and larger economic size are exposed to higher systematic covariances with the world stock market. Conversely, we obtain an inverse link between international reserves and systematic risks in national equity. Keywords Portfolios · Stock market · Cross-country · Systematic risk · Capital asset pricing model · Macroeconomic covariates JEL Classification F30 · F31 · F41 · G15
We thank John Burger, Charles Calomiris, Scott Dressler, Vahagn Galstyan, Erasmus Kersting, George Tavlas, and two anonymous referees for very helpful comments and suggestions. Ryan Zalla, Bernard Zaritsky, Riley McCarten, Yanyao Shi, Ibrahim Annabi, and Rashaad Robinson provided diligent research assistance. Electronic supplementary material The online version of this article (https://doi.org/10.1007/s11079-020-09579-2) contains supplementary material, which is available to authorized users. Adnan Velic
[email protected] Michael Curran [email protected] 1
Villanova University, Villanova, PA, USA
2
Technological University Dublin, Dublin, Ireland
M. Curran, A. Velic
1 Introduction The capital asset pricing model (CAPM) is often presented as one of the cornerstones of financial economics (Lo 2017; Campbell 2018), and highlighted to be of particular relevance to those interested in the long run (Jagannathan and McGrattan 1995). From the pool of asset pricing models in the literature, Berk and van Binsbergen (2016) find that the CAPM is closest to the model that investors use in making capital allocation decisions. Despite providing an intuitive and elegant explanation of asset returns, the theory has enjoyed scant success in empirical assessments (Black et al. 1972; Stambaugh 1982; Campbell and Vuolteenaho 2004; Asness et al. 2013; Fama and French 1992, 1993, 2004, 2006, 2015, 2016; Bai et al. 2019). According to such tests, the popularity of the CAPM is rather puzzling. In contrast, our paper provides more favorable global evidence using national-level data. A further novelty of our work is that we probe into the macroeconomic covariates of systematic risks (betas) in national equity markets. While most studies focus on the performance of the CAPM intranationally, our paper offers evidence at the international level.1 Instead of designating individual firm-level stocks, we concentrate on entire national stock markets across a large sample of developed, eme
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