Testing CAPM Using Markov Switching Models: Application to ASEAN-6 Stock Markets

Abstract

In this study, six finance stocks traded in FTSE ASEAN 40 index (ASEAN market) are tested and analysed using the two-state Markov Switching Capital Asset Pricing Model (MS-CAPM). We consider eight MS-CAPM specifications including MSI-CAPM, MSIH-CAPM, MSIB-CAPM, MSIBH-CAPM, MSH-CAPM, MSB-CAPM, MSBH-CAPM and linear CAPM and the best specification of CAPM. We find that MSB-CAPM model (with switching beta risk parameter) is the best fit model for Vietnam, Indonesia, Malaysia and Singapore stock returns, MSBH-CAPM model (with switching beta parameter and heteroskedasticity) for Philippines stock return and MSIBH-CAPM model (with switching intercept term, beta parameter and heteroskedasticity) for Thailand stock return. These results confirm the heterogeneous structure of CAPM using Markov switching models.