Abstract
The cornerstone of the capital asset pricing model (CAPM) lies with its beta. The question of whether or not beta is dead has attracted great attention from academics and practitioners in the last 50 years or so, and the debate is still ongoing. Many empirical studies have been conducted to test the validity of beta within the framework of CAPM. However, it is a claim of this paper that beta at the industry level has been largely ignored in the current literature. This study is conducted to examine if beta, proxied for a systematic risk, should be considered valid in the application of the CAPM at the industry level for Australia using daily data on 2200 stocks listed on the Australian Securities Exchange from January 2007 to 31 December 2016. Various portfolio formations are utilized in this paper. General economic conditions such as interest rate, inflation, and GDP are examples of systematic risk. Findings from this study indicate that the selection of portfolio construction, estimation technique, and news about economic conditions significantly affects the view whether or not beta should be considered as a valid measure of systematic risk.
Highlights
The capital asset pricing model (CAPM) has gained acceptance for use by academics and practitioners for an extended period of time
We extend the Savor and Wilson (2014) study by considering the validity of beta in the framework of the CAPM at the industry level in Australia
The key objective of this paper is to examine the hypothesis that beta is a measure of systematic risk at the industry level in Australia
Summary
The capital asset pricing model (CAPM) has gained acceptance for use by academics and practitioners for an extended period of time. A recent work by Savor and Wilson (2014) presented that beta is an important measure of systematic risk. They found that beta is strongly, as well as positively, related to average excess return on days when inflation, employment, or Federal Open Market Committee interest rate decisions, which are generally considered sources of systematic risk, are announced. We extend the Savor and Wilson (2014) study by considering the validity of beta in the framework of the CAPM at the industry level in Australia. We argue that various industries within the same economy exhibit different level of responsiveness of news into stock prices
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