Time Varying Behavior of Share Returns in Australia: 1988–2004

Abstract

The model in this paper is similar to Brailsford and Faff (1997), using a conditional CAPM model with the GARCH-M framework, but with a significant additional dummy term (in the conditional mean of the share return) that will help explain the models better in both economic and statistical sense. The relatively simpler asymmetric model in this paper is compatible to other more complex asymmetric models and hence should be easier to model and explain for practical purposes. The model in this paper is also a more effective model, in both economical and statistical terms, as compared to some other models in the GARCH family as it captures the asymmetric effect in the modeling process in both the conditional first and second moments. The findings in this paper have contributed in re-evaluating the nature and process of time varying behavior of time series of stock returns and will provide researchers and practitioners additional options and incentives to explore for future research. We have also provided statistical and practical reasons to support these findings.