Date of Submission
Campus Only Senior Thesis
Bachelor of Arts
© 2017 Arya K. Nakhjavani
This paper examines the capital - asset pricing model (CAPM) which has been extended with a factor for geo-political risk. I use monthly stock return data for all stocks listed on a major US exchange from January 1990 to December 2016 and utilize a Fama-Macbeth Regression with Newey-West standard errors to test the geo-political augmented Sharpe-Lintner CAPM. The paper first determines if increased sensitivity to geopolitical risk lead s to lower average returns and second assesses if geo-political risk as an explanatory variable is a significant enough to expose a failure of the CAPM to capture expected returns fully through beta. The results of our regressions do not confirm the hypothesis that firms with high sensitivities to geo-political risk have expressly different returns in the long run. Furthermore, our Fama-Macbeth regression does not find expressly significant average slopes for geo-political risk as a variable.
Nakhjavani, Arya, "Geo-Political Risk-Augmented Capital Asset Pricing Model and the Effect on Long-Term Stock Market Returns" (2018). CMC Senior Theses. 1764.
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