An Advanced Time-Varying Capital Asset Pricing Model via Heterogeneous Autoregressive Framework: Evidence from the Chinese Stock Market

Abstract

The capital asset pricing model (CAPM) is a foundational asset pricing model that is widely applied and holds particular significance in the globally influential Chinese stock market. This study focuses on the banking sector, enhancing the performance of the CAPM and further assessing its applicability within the Chinese stock market context. This study incorporates a heterogeneous autoregressive (HAR) component into the CAPM framework, developing a CAPM-HAR model with time-varying beta coefficients. Empirical analysis based on high-frequency data demonstrates that the CAPM-HAR model not only enhances the capability of capturing market fluctuations but also significantly improves its applicability and predictive accuracy for stocks in the Chinese banking sector.

Keywords

• capital asset pricing model
• heterogeneous autoregressive model
• realized correlation
• realized volatility
• intraday high frequency data
• Chinese stock market