# What is market model?

Hi all, What is the market model? Thanks

rtfm

what is rtfm? read the f*cking material? haha

cpk seems like IT guy? Read the fine manual!

I am sorry. If you understand something and lay out what you understand to confirm - that is one think. but asking a blanket question - is not something that at least I can tolerate at this time. the other way asking a question based on your understanding leads to discussion which enhances learning. hence sorry about the rtfm part… but hope u understand.

I am rusty on SS18, so I can try to add some points here: from s. sauce, SS18: The market model is the regression model often used to estimate betas for common stocks. Specifically, it defines return to Asset i, R i as: R i = alpha i + Beta i* Return on mkt + Error The market model makes three predictions: 1. E(R i) = alpha i + Beta i * E(Return on mkt) 2. Variance i = Beta i squared * variance mkt + variance i of error 3. Covariance i j = Beta i * Beta j * variance of the market

I am confused between Market and macroeconomic model.

saurya_s Wrote: ------------------------------------------------------- > I am confused between Market and macroeconomic > model. Listen to your question. Market model for what? Macroeconomic model for what? There are millions of macroeconomic and market models. Ask a ridiculous question, and you will get a smartass answer…

macroeconomic model – immediately think Surprise model - and a regression model uses macroeconomic factor surprises. market model - what Phil has written above. also variance i of error that has been written above is the firm specific factors - which can be diversified away. beta^2*variance of market -> is the market specific non-diversifiable factor. traditonal CAPM model - you need a large # of estimates - returns, variances, + matrix of correlation coefficients. Market model - need far fewer - for n assets - you need 3 n + 2 estimates. (n returns, n betas, n variances + market return, market variance) . linkage between market model and CAPM -> return equation R(i) = rf + beta*(rm-rf)

The market model is used to estimate betas. The macroeconomic model uses surprises in economic variables as risk factors to describe the security returns: ie GDP, inflation, interest rates where Surprise = Actual value of GDP - (Mkt Consensus, predicted value of factor)

cpk123 Wrote: ------------------------------------------------------- > rtfm I second that. I am seeing many questions on forum recently where poster wants others to define that for him.

Is the market model the same a sthe single-index market model described here?

http://en.wikipedia.org/wiki/Single-index_model

In that link, the LHS is asset i’s premium return over the risk-free rate, and the RHS contains market risk premium. The question is, what’s right? Using premiums or using absolute returns??