Testing a Multi-factor Capital Asset Pricing Model in the Jordanian Stock Market

Mohammad K Elshqirat,Mohammad M Sharifzadeh

doi:10.5539/ibr.v11n9p13

Abstract

A valid and accurate capital asset pricing model (CAPM) may help investors and mutual funds managers in determining expected returns which may lead to increase their profits and community resources. The problem is that the traditional CAPM does not accurately predict the expected rate of return. A more accurate model is needed to help investors in determining the intrinsic price of the financial asset they want to sell or buy. The purpose of this study was to examine the validity of the single-factor CAPM and then develop and test a multifactor CAPM in the Jordanian stock market. The study was informed by the modern portfolio theory and specifically by the single-factor CAPM developed by Sharpe, Lintner, and Mossin. The research questions for the study examined the factors that may explain the variation in the expected rate of return on stocks in the Jordanian stock market and the relationship between the expected rate of return and factors of market return, company size, financial leverage, and operating leverage. A causal-comparative quantitative research design was employed to achieve the purpose of the study by testing the listed companies on the Amman stock exchange (ASE) for the period from 2000 to 2015. Data were collected from the ASE database and analyzed using the multiple regression model and t test. The results revealed that market return, company size, and financial leverage are not predictors of the expected rate of return while operating leverage is a predictor.

Highlights

The stock returns are reduced when the investor buys a stock at more than its intrinsic price and when he or she sells the stock at less than that price, the problem is how stocks are or should be priced (Mossin, 1966)
The results of hypotheses testing revealed the single-factor capital asset pricing model is invalid in the Jordanian stock market
This conclusion is in line with the results of studies of many researchers who reached the same conclusion about this market (Alqisie & Alqurran, 2016; Alrgaibat, 2015; Blitz et al, 2013) and about many other countries (Dajčman et al, 2013; Dzaja, & Aljinovic, 2013; Li, Gan, Zhuo, & Mizrach, 2014; Nyangara et al, 2016; Obrimah et al, 2015; Saji, 2014; Wu et al, 2017)

Summary

Introduction

The stock returns are reduced when the investor buys a stock at more than its intrinsic price and when he or she sells the stock at less than that price, the problem is how stocks are or should be priced (Mossin, 1966). One model that can be used for pricing the stocks is the capital asset pricing model (CAPM) which was introduced by Sharpe (1964), Lintner (1965), and Mossin (1966) This single-factor model was tested by many researchers (Alqisie & Alqurran, 2016; Dajčman, Festić, & Kavkler 2013; Wu, Imran, Feng, Zhang, & Abbas, 2017) who concluded that the model is not able to accurately determine the expected rate of return on the financial asset. This inability of the single-factor CAPM represents the main problem in this study. It may be very important to develop a model that can determine the expected rate of return more accurately than the single-factor model

Objectives

Methods

Results

Conclusion