The conditional capital asset pricing model (CAPM) theory postulates that the systematicrisk (b) of an asset or portfolio varies over time. Several dynamics are thus given to systematic risk inthe literature. This article looks for the dynamic that seems to best explain the returns of the assets ofthe Regional Stock Exchange of West Africa (BRVM) by comparing two dynamics: one by the Kalmanfilter (assuming that the b follow a random walk) and the other by the Markov switching (MS) model(assuming that b varies according to regimes) for four portfolios of the BRVM. Having found a linkbetween the beta of the market portfolio and the size criterion (measured by capitalization), the twoprevious models were re-estimated with the addition of the SMB (Small Minus Big) variable. Theresults show according to the RMSE criterion that the estimation by the Kalman filter fits better thanMS, which suggests that investors cannot anticipate systematic risk because of its high volatility.
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