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Estimating the Market Risk Exposure through a Factor Model with Random Effects

In this thesis, we set out to model the market risk exposure for 251 stocks in the S&P 500 index, during a ten-year period between 2011-04-30 and 2021-03-31. The study brings to light a model not often mentioned in the scientific literature focused on market risk estimation, the linear mixed model. The linear mixed model makes it possible to model a time-varying market risk, as well as adding structure to the idiosyncratic risk, which is often assumed to be a stationary process. The results show that the mixed model is able to produce more accurate estimates for the market risk, compared to the baseline, which is here defined as a CAPM model. The success of the mixed model, which we in the study will refer to as the ADAPT model (adaptive APT), most certainly lies in its ability to create a hierarchical regression model. This makes it possible to not just view the set of observations as a single population, but let us group the observations into different clusters and in such a way makes it possible to construct a time-varying exposure. In the last part of the thesis, we highlight possible improvements for future works, which could make the estimation even more accurate and also more efficient.

Identiferoai:union.ndltd.org:UPSALLA1/oai:DiVA.org:liu-187909
Date January 2022
CreatorsBörjesson, Lukas
PublisherLinköpings universitet, Tillämpad matematik, Linköpings universitet, Tekniska fakulteten
Source SetsDiVA Archive at Upsalla University
LanguageEnglish
Detected LanguageEnglish
TypeStudent thesis, info:eu-repo/semantics/bachelorThesis, text
Formatapplication/pdf
Rightsinfo:eu-repo/semantics/openAccess

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