CAPITAL ASSET PRICING MODEL TESTING IN WEST AFRICA ECONOMIC AND MONETARY UNION STOCK MARKET: THE CASE OF IVORIAN LISTED FIRMS

Zimy Samuel Yannick Gahé,Brou Matthias Allate,Thierry Belinga,Zhao Hongzhong

doi:10.29121/granthaalayah.v5.i2.2017.1699

Abstract

This paper investigates the validity of Capital Asset Pricing Model (CAPM) for the West African Economic and Monetary Union (WAEMU) stock market using monthly stock returns of twenty Côte d’Ivoire’s listed firms from January 2002 to December 2011. We split this interval into different time periods. Each one of them has also been divided into two different sub-periods among which one served as estimation mean and the second one helped to test the estimated parameters obtained using a times series regression. Afterwards some statistical tests have been conducted to see whether the CAPM’s hypotheses hold or not. The findings showed that higher risk is not associated with higher level of return within the study area. Also, there was no relation between stock return and non-systemic risk except for one period where we found evidence that stock returns were affected by other risk than the systematic risk. On the contrary the stock expected rate of return had a linear relationship with the systematic risk. The study suggested that the listed companies consider other factors and variables which could explain their returns.

Highlights

One of the most important developments in modern capital theory is the Capital Asset Pricing Model (CAPM) as developed by Sharpe (1964), Lintner (1965) and Mossin (1966)
This paper investigates the validity of Capital Asset Pricing Model (CAPM) for the West African Economic and Monetary Union (WAEMU) stock market using monthly stock returns of twenty Côte d’Ivoire’s listed firms from January 2002 to December 2011
There was no relation between stock return and non-systemic risk except for one period where we found evidence that stock returns were affected by other risk than the systematic risk

Summary

Introduction

One of the most important developments in modern capital theory is the Capital Asset Pricing Model (CAPM) as developed by Sharpe (1964), Lintner (1965) and Mossin (1966). Given the risk-free rate and the beta of an asset, the CAPM predicts the expected risk premium for an asset (Fama and French, 2004). Findings show that data were consistent with the predictions of the CAPM i.e. the relation between the average return and beta is very close to linear and portfolios with high (low) betas have high (low) average returns. Another classic empirical study that supports the theory is that of Fama and MacBeth (1973); they examined whether there is a positive linear relation between average returns and beta. These differences in previously conducted studies as well as the lack of studies dealing with such technique in west Africa serve as a major stimulating factor motivating the present paper

Model Description

Whole Study

Conclusion