Bad beta, good beta and stochastic volatility in an inter-temporal asset pricing model for the Kenyan stock market
Date
2018
Authors
Kimundi, Gillian Nduku
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
The study seeks to investigate whether bad beta (sensitivity to cash-ow news), good beta (sensitivity to discount rate news) and volatility news are significantly priced in the Kenyan stock market. A comparison of the 3 models is done: 2-beta pricing model (with cash-ow news and discount rate news as risk factors), a 3- beta model (including volatility news) and a 4-beta model (including covariation risk in cash-ow and discount rate news). The findings from the study suggest that news terms related to cash flows, discount rates, volatility and the covariation of cash-ow news and discount rate news are all significantly priced in the Kenyan Market. There is evidence that Kenyan investors are highly risk averse, more so towards cash-ow news, than they are to discount rate news. Similarly, the premium charged for volatility news is just as high as that attached to cash flow news. Investors also attach a significant but relatively smaller premium to the risk due to covariation between cash-ow news and discount rate news.
Description
A Dissertation submitted in partial fulfillment of the requirements for the Master of Science in Mathematical Finance (MSc.MF) at Strathmore University
Keywords
Bad Beta, Good Beta, 2-Beta Pricing Model, 3-Beta Pricing Model, 4-Beta Pricing Model