Four-State Model vs. Market Model: Part I

Octave Jokung, Jean-Christophe Meyfredi: The present paper conducts an empirical study by examining the Market Model and the three versions of the 4-State Model (translated, rotated and un-rotated) in a mean-beta framework.

Author(s):

Octave Jokung

EDHEC Business School

Jean-Christophe Meyfredi

EDHEC Business School

Using daily returns from the CAC 40 Index's assets, we find that the explanatory power of the 4-State Model is greater than the one of the Market Model and this effect is improved by rotation. A reduction in the non-systematic risk is also observed when switching from Market Model to 4-State Models. Surprisingly, the betas are more stable when using any version of the 4-State Model.

Type: Working paper
Date: le 01/11/2002
Research Cluster : Finance

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