Abstract
Purpose: Capital asset pricing model (CAPM) has been one of the major asset pricing tools applied on the capital market to price listed securities. Several researchers have challenged the overall efficiency and validity of the model in terms of its ability to explain the behavior of the average returns on the basis of a single variable. The debate is now taking a new trend which aimed at assessing the robustness of the model in varying market conditions and this has been the main focus of the study; that is to determine whether or not CAPM applies to securities on Ghana Stock Exchange at different market conditions.Methodology: Data on monthly returns of 29 shares were selected from the Ghana Stock Exchange spanning from 2010 to 2018 and analyzed using regression analysis on the assumption of constant risk and varying risk situations.Findings: The study evidenced that the systematic risks differ between bulls, tranquil and bear periods. Market conditions therefore have impact on the CAPM model. CAPM is not robust with changes in market conditions after all especially in an emerging market such as the Ghana Stock Exchange.Contribution to theory, practice and policy: The result of this study implies that, the widely accepted CAPM for asset pricing model is not robust to changes in market conditions. It is therefore essential to predict future market conditions when formulating investment strategy as an investor. Again, investors should vary their risk premium depending on their expectation of the market conditions at the time of investment.
Highlights
AND MOTIVATIONUnder a set of specified assumptions1, the basic model in the finance literature that explains the behavior of required returns on capital assets has been the Capital Asset Pricing Model (CAPM) developed by Sharpe (1964), Lintner (1965) and Mossin (1968) as an improvement of the Markowitz portfolio theory
RECOMMENDATION The main focus of the study is to determine whether or not CAPM applies to securities on Ghana Stock Exchange at different market conditions
Empirical studies on the traditional CAPM with constant risk assumption has been found not to be consistent in different market conditions and literature on asset pricing argues that the traditional CAPM is not as robust as it has been proven to be since the systematic risks on securities on the market are not stable over time
Summary
AND MOTIVATIONUnder a set of specified assumptions, the basic model in the finance literature that explains the behavior of required returns on capital assets has been the Capital Asset Pricing Model (CAPM) developed by Sharpe (1964), Lintner (1965) and Mossin (1968) as an improvement of the Markowitz portfolio theory. CAPM stipulate that, the variation in the average returns on capital asset over time is explained by the level of systematic risk (measured by beta) that the investment is exposed to. Fabozzi and Francis (1977) proposed that, varying risk model is more preferable in examining the stability of the systematic risk index over these two markets. Studies on CAPM validity argue that, being a constant risk model, CAPM cannot be relied upon when there is a change in the market conditions; that is, in a Bull market and Bear market. Their finding points out that, beta is stable over time even when there are changes in the market conditions. Similar studies which provided a sharp contrast to Fabozzi and Francis study includes French (2016) and Eisenbesis (2007) who argue that, the beta changes when there is a change in the capital market conditions
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