Abstract
This paper aimed to test the validity of capital asset pricing model (CAPM) and arbitrage pricing theory (APT) in Jordanian stock Market using three different firms of three main sectors, financial, industrial, and service sector for the period Q1 (2000) to Q4 (2016), using published information obtained from Amman stock exchange (ASE), these models were designed to measure the cost of capital using the coefficient of systematic risk factor, that used in the valuation of capital assets. We reviewed the most important similarities and differences between the two models out of sectors analysis. The study showed, first, there are some differences between the two models in term of the amount of systematic risk that can be eliminated by diversification in the three sectors. Second, the application of APT model showed that large percentage of risk can be eliminated by diversification more than CAPM model. Third, the banking sector in Jordan faces more systematic risks than other sectors.
Highlights
The Market liquidity of is key factor in assets valuation, any deviations from liquidity will be reflected in mispriced assets
This paper aimed to test the validity of capital asset pricing model (CAPM) and arbitrage pricing theory (APT) in Jordanian stock Market using three different firms of three main sectors, financial, industrial, and service sector for the period Q1 (2000) to Q4 (2016), using published information obtained from Amman stock exchange (ASE), these models were designed to measure the cost of capital using the coefficient of systematic risk factor, that used in the valuation of capital assets
Any returns in excess of the pure interest rate for any investment will depend on the beta coefficient, which measured by the covariance between investment and market returns, but the validity of this relation is restricted with the presence of several theoretical assumptions that cannot be exist in real market place; like lending and borrowing at the same rate, for example. the APT model (Ross, 1976) which is similar to CAPM, seems to hold more practical implications than CAPM since it correlates the risk premium of capital assets with multifactor models; these factors in its entirety depend on macroeconomics indicators like GDP growth, inflation, and interest rates (Fama & French, 1993)
Summary
The Market liquidity of is key factor in assets valuation, any deviations from liquidity will be reflected in mispriced assets For this reason, the major concern of the asset pricing models is to examine the degree of capital market liquidity, the rational behavior included in any financial or investment decisions should aim to improve the liquidity of any instruments exchanged (Brennan & Subrahmanyam, 1996; Shannak & Obeidat, 2012; Obeidat et al, 2013; Masa’deh et al, 2015). The capital assets pricing model (CAPM) and arbitrage pricing theory (APT) tried to quantify this rationality by modeling the expected returns on any capital investment asset with its relevant risk factors, where any excess returns over pure interest rate (risk free rate) reflects additional risk exposures. The CAPM and APT assumed that the investment is overpriced or underpriced if the actual returns deviates from required or expected, this will create an arbitrage opportunity which can be eliminated distinctly by continuous price mas.ccsenet.org
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