Estimation of Beta-Adjusted Parameters in Capital Asset Pricing Model under Non-Constant Volatility

Abstract

The Capital Asset Pricing Model (CAPM) standard equation states that the equilibrium of the capital market will be indicated by the stock market (asset) line, where the line connects risk-free investment opportunities and risky investments. The beta parameter coefficient in the CAPM is a measure of systematic risk in the capital market, whose value must be estimated accurately.In this paper, we will examine the beta-adjusted parameter estimation when the market index return has a constant volatility. Non-constant volatility in the return of the market index was analyzed using generalized autoregressive conditional heteroscedastic (GARCH) models. Furthermore, using beta estimators, average beta estimator values, and beta estimator volatility, are used to predict the future beta-adjusted coefficient.Such an assessment method is used to analyze several stocks traded on the Indonesia Stock Exchange (IDX). The results show that the beta-adjusted estimator under volatility is not constant in accordance with actual market conditions. So that it can be considered in estimating beta-adjusted in the capital market.