Authors: Houda Ben Mabrouk; Abdelfettah Bouri
Addresses: Corporate Finance and Financial Theory (COFFIT), University of Sfax, 73 street elksar Ksibet sousse, 4041 sousse, Tunisia ' Route de l'Aéroport, Km 4, Sfax 3018-Tunisia
Abstract: This paper attempts to model the risk return relationship within the CAPM using the copula theory. Applying the Gaussian copula and using the inference functions of margins (IFM) method on both Tunisian and international data, the results indicate that a linear and a monotonous specification of the dependence is with no doubt erroneous constituting an explicit departure from the CAPMs assumptions. Without making restrictions on the margins, the results show also that the Gaussian copula is the best fit for the data. The resort to copula permits to draw the level curves of the bi-dimensional VAR and to examine, for a given level of confidence, the marginal substitution rate between the VAR of two univariate risks. We, particularly, analyse different diversification strategies. The results indicate that emerging markets may afford substantial gains for international diversification. However, the profitability of the intra and inter-sectoral diversification is heavily dependent on the market considered (emerging versus developed).
Keywords: CAPM; capital asset pricing model; copula theory; inference functions of margins; IFM; linearity; monotonicity; bi-dimensional VAR; diversification strategy; Tunisia; emerging markets; international diversification.
International Journal of Accounting and Finance, 2013 Vol.4 No.1, pp.35 - 62
Received: 27 Oct 2011
Accepted: 23 Nov 2012
Published online: 05 Apr 2013 *