Modeling and Assessing Systematic Risk in Stock Markets in Major Oil Exporting Countries

Introduction: This paper aims to assess time variability of beta coefficients (systematic risk) of Capital Asset Pricing Model (CAPM) using data from five key sectors in Saudi Arabia and Kuwait stock markets.Material and methods: To assess time -varying systematic risk we employed symmetric as well as asymmetric conditional volatility specifications to account for skewness and leptkurtosis of high frequency financial time series to better specify conditional higher moments.Results & Discussions: The results of the paper support significant evidence of time-varying beta coefficients for all sectors included in the study. This result invalidates, at least in the context of the sample country’s capital markets, the standard application of (CAPM) that assumes constant beta coefficients. Also indicated in the paper, time-varying beta estimates are consistent with a modified version of CAPM prediction that is portfolios with wider range of beta variations expected to yield higher return values and those with lower range of beta variations yield lower returns.Conclusion: In this new context, risk is no longer is a point estimate as implied by the standard CAPM model, but it is a range of values. Our findings also show the size and the range of beta variations are sensitive to skewness and fat tailedness that characterize asset returns distribution