Do time-varying betas help in asset pricing? Evidence from the Borsa Istanbul Stock Exchange

The purpose of this thesis is to investigate the time variation in betas of nonfinancial firms traded in the Borsa Istanbul Stock Exchange over the period from January, 1998 to December, 2011 by utilizing the threshold CAPM of Akdeniz, Altay-Salih & Caner (2003). The threshold CAPM defines beta as a function of an underlying economic variable, namely the threshold variable, to allow beta to change among two different regimes when the threshold variable hits a certain threshold level. For empirical analysis, monthly observations of interest rates, currency basket, real effective currency index, and market volatility are selected as candidates for the threshold variable. The empirical findings indicate significant time variation in betas during the sample period due to rate of changes in the currency basket level. The findings of this study also suggest that dynamics of time variation in betas differ across industry specifications, market capitalizations and book-to-market ratios. Furthermore, comparing the pricing performance of the model with the traditional CAPM via time-series regressions, the threshold CAPM performs better in pricing.