Skip to main content

Market regimes, sectorial investments, and time-varying risk premiums

Buy Article:

$54.08 plus tax (Refund Policy)

Abstract:

Purpose ‐ This paper aims to extend the Fama and French (FF) three-factor model in studying time-varying risk premiums of Sector Select Exchange Traded Funds (ETFs) under a Markov regime-switching framework. Design/methodology/approach ‐ First, the original FF model is augmented to include three additional macro factors ‐ market volatility, yield spread, and credit spread. Then, the FF model is extended to a model with a Markov regime switching mechanism for bull, bear, and transition market regimes. Findings ‐ It is found that all market regimes are persistent, with the bull market regime being the most persistent, and the bear market regime being the least persistent. Both the risk premiums of the Sector Select ETFs and their sensitivities to the risk factors are highly regime dependent. Research limitations/implications ‐ The regime-switching model has a superior performance in capturing the risk sensitivities of the Sector Select ETFs, that would otherwise be missed by both the FF and the augmented FF models. Originality/value ‐ This is the first research on Sector Select ETFs with Markov regime switching.

Keywords: Compensation; Markov processes; Risk management; Time-varying control systems

Document Type: Research Article

DOI: http://dx.doi.org/10.1108/17439131111122120

Publication date: April 5, 2011

Access Key

Free Content
Free content
New Content
New content
Open Access Content
Open access content
Partial Open Access Content
Partial Open access content
Subscribed Content
Subscribed content
Free Trial Content
Free trial content
Cookie Policy
X
Cookie Policy
Ingenta Connect website makes use of cookies so as to keep track of data that you have filled in. I am Happy with this Find out more