CAPM with Independent Regimes for the Alpha and Beta and an Application in Portfolio Optimization

Author : Suwapith Payakapong

Abstract :We develop the regime-dependent CAPM, in which the alpha and beta follow independent regime switching processes, and use it in the mean-variance optimization framework. We find that the predicted returns from the model have a larger rank correlation with the realized future returns than those from the classical CAPM and the common-regime CAPM, which assumes common-regime shifts between the alpha and beta. The mean-variance portfolio derived from our model yields a superior out-of-sample risk-adjusted return compared to the portfolios derived from the equal weight strategy, market index replication, the classical CAPM and the common-regime CAPM

Keywords :Alpha, Beta, CAPM, Regime-switching Model.

Conference Name :International Conference on Recent Advances in Economics, Finance and Statistics (ICRAEFS-25)

Conference Place Pattaya, Thailand

Conference Date 12th Jul 2025