Abstract
ABSTRACT This article examines three models for pricing risky assets, the capital asset pricing model (CAPM) from Sharpe and Lintner, the three factor model from Fama and French, and the four factor model from Carhart, in the Brazilian mark et for the period from 2002 to 2013. The data is composed of shares traded on the São Paulo Stock, Commodities, and Futures Exchange (BM&FBOVESPA) on a monthly basis, excluding financial sector shares, those with negative net equity, and those without consecutive monthly quotations. The proxy for market return is the Brazil Index (IBrX) and for riskless assets savings accounts are used. The 2008 crisis, an event of immense proportions and market losses, may have caused alterations in the relationship structure of risky assets, causing changes in pricing model results. Division of the total period into pre-crisis and post-crisis sub-periods is the strategy used in order to achieve the main objective: to analyze the effects of the crisis on asset pricing model results and their predictive power. It is verified that the factors considered are relevant in the Brazilian market in both periods, but between the periods, changes occur in the statistical relevance of sensitivities to the market premium and to the value factor. Moreover, the predictive ability of the pricing models is greater in the post-crisis period, especially for the multifactor models, with the four factor model able to improve predictions of portfolio returns in this period by up to 80%, when compared to the CAPM.
Highlights
Adriana Bruscato Bortoluzzo, Maria Kelly Venezuela, Maurício Mesquita Bortoluzzo & Wilson Toshiro NakamuraThe capital asset pricing model (CAPM), developed by Sharpe (1964) and Lintner (1965) has been the model that is most widely used by the market for calculating expected rates of return on risky assets
The main aim of this article is to verify whether there was any alteration in the correlation structure of the single and multifactor model variables due to the occurrence of the 2008 crisis, that is, to examine the behavior of risk premiums in the Brazilian market in the periods before and after the 2008 financial crisis
It is verified that the market risk premium for the whole sample was positive, as expected, and equal to 0.89% a month and statistically significant to 10%
Summary
Adriana Bruscato Bortoluzzo, Maria Kelly Venezuela, Maurício Mesquita Bortoluzzo & Wilson Toshiro NakamuraThe capital asset pricing model (CAPM), developed by Sharpe (1964) and Lintner (1965) has been the model that is most widely used by the market for calculating expected rates of return on risky assets. The CAPM calculates expected excess return on risky assets as the only function of their systematic risk, subsequent empirical studies indicate the existence of other factors that influence achieved historic returns. Stattman (1980) showed that the average return on US shares is greater for value companies, or rather, those with a high book value of net equity to market value ratio (high book-to-market index [BM]). Based on these market anomalies, Fama and French (1993) proposed an empirical model in which they identified three risk factors that would determine expected return on shares: the market factor, the factor related to the size of the firm, and another to the BM index. Carhart (1997) added a fourth factor, related to momentum, based on evidence from Jegadeesh and Titman (1993) regarding significantly positive historic returns from adopting a strategy of buying winning shares funded by the sale of losing shares
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