Market model parameter estimates and portfolio applications: evidence from the Taiwan stock exchange

Abstract

The single index model, first suggested by Markowitz (1959) and formalized by Sharpe [1965] and known as the market model, has greatly influenced the application of the mean-variance portfolio formation pioneered by Markowitz [1952, 1959]. In addition to being utilized by portfolio managers, the market model is frequently employed in efficient market tests. About the same time as the mean-variance allocation model was becoming more widely known, Sharpe, Lintner, and Mossin developed asset pricing theory into what has become known as the Capital Asset Pricing Model. This put further emphasis on research concerning our estimation of beta and our understanding of its characteristics and determinants as well as applicability for portfolio formation.