By: Kusdhianto SETIAWAN
JEL: G12, G11, G15
Keywords: CAPM, Time Varying Beta, Seemingly Unrelated Regression (SUR), multivariate GARCH
Considering the heteroscedasticity and cross-correlation in the error terms of
international stock market returns, International Capital Asset Pricing Model (CAPM) is
reinvestigated under Seemingly Unrelated Regression (SUR) and SUR with GARCH (SURGARCH)
framework.We modified Feasible Generalized Least Square (FGLS) estimator to
take into account multivariate GARCH error structure in estimating the model. World market
portfolio was constructed to ensure that the market portfolio is mean-variance efficient under
no restriction on short selling and borrowing at riskless rate. CAPM fits well only on ex-post
SUR test, but it is rejected on SUR-GARCH for both ex-ante and ex-post test. However, this
paper found that CAPM could be applied for most stock market indexes when each equation
in SUR system was analyzed individually.
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