Capital Asset Pricing Research Articles

Calculation of the discount rate for the Russian market in present-day conditions

Subject. This article focuses on the consideration of the algorithm and methodological approaches to assessing the cost of capital. Objectives. The article aims to develop a practical algorithm for assessing the cost of capital and calculating the discount rate based on ruble risk-free assets and Russian financial statistics. Methods. For the study, we used the Weighted Average Capital Cost (WACC) and Capital Asset Pricing (CAPM) models. Results. The article offers a tested step-by-step algorithm for calculating the cost of capital and risk premium loading to it using domestic financial statistics. It also justifies the need to take non-systematic risks out and beyond the weighted average capital cost and offers a deterministic mechanism for their assessment. Conclusions and Relevance. The author-developed algorithm for estimating the cost of capital, as well as methodological recommendations for its use, can be used by domestic investors to make the necessary decisions, as well as by the financial services of Russian companies to build the economic policy of the company. Using the proposed approach may help obtain a more adequate assessment of the cost of capital of Russian companies for domestic investors, thereby improving their competitiveness.

Testing Distributions in Banking Sector Loans with Different Computer Programs: An Experimental Analysis for Turkey

Within the fields of risk management and banking, the normality condition is one of the basic assumptions to apply value at risk, capital asset pricing or linear regression models on credit risk assessment. However, banking sector data related to loans may not be normally distributed. Hence, it needs to be put through scientific tests. For this purpose, firstly, Anderson-Darling, Jarque-Bera, Kolmogorov-Smirnov, Shapiro-Wilk, and Shapiro-Francia tests are applied to ninety-two banking sector loan variables and it is demonstrated that most of the variables are not normally distributed. Additionally, the parameters of Normal, Birnbaum-Saunders, Exponential, Extreme Value, Gamma, Generalized Extreme Value, Inverse Gaussian, Log-Logistic, Logistic, Lognormal, Nakagami, Negative Binomial, Non-Parametric, Poisson, Rayleigh, Rician, t- Location-Scale, and Weibull distributions are estimated for loan variables. Thirdly, when the data are not normally distributed, it is necessary to examine the other test results. Therefore, Kolmogorov-Smirnov, Anderson Darling, and Chi-square test results are employed for sixty-one distributions related to the variables and best fitted distribution per variable is aimed at. The results indicate that different computer codes and programs may give different outcomes in connection with the normality and best fitting distribution. Therefore, the use of different strategies may also be adopted in risk management courses along with the traditional ones since the normality assumption is an essential first step for the application of such techniques. Finally, pedagogically speaking, it should be noted that teaching the essence of mathematical background and computer codes could be strategically useful for students in internalizing these distribution concepts. Keywords: distribution, banking sector loans, risk management

Does Idiosyncratic Risk Affect Earnings Quality? Evidence from Indonesia

This study examines whether idiosyncratic risk significantly affects earnings quality in non-financial companies listed on the Indonesia Stock Exchange. Research on developing countries, especially Indonesia, which links idiosyncratic risk and earnings quality, has not been widely conducted. This is interesting because the characteristics of the markets in developing countries are different from those in developed countries. This study uses the dependent variable of earnings quality, which is the residual value of the Kasznik and Dechow–Dichev model, and idiosyncratic risk, which is measured based on the Capital Assets Pricing and Fama–French models. The overall results indicate that high idiosyncratic risk is associated with low earnings quality (large residual value). Robustness tests are also conducted based on groups of positive and negative profit companies, as well as industry groups. The same results were obtained for each earnings component, namely, innate and discretionary factors. These findings contribute to the development of firm-specific risk literature as an additional analytical tool to assess earnings quality based on accrual rates. This allows regulators and standard-setters to provide more relevant information regarding investment decisions.

TESTING THE APPLICABILITY OF THE CAPM MODEL USING SELECTED SHARES LISTED ON THE BELGRADE STOCK EXCHANGE

One of the basic types of portfolio valuation as well as valuation of individual company shares is the CAPM (Capital Asset Pricing) model, which uses a well-known measure of systemic risk in its analysis, which is beta. The CAPM model in its analysis uses the link between the systemic risk measure (beta) and the expected market return. Guided by this model, the analysis of monthly returns of selected shares on the Belgrade Stock Exchange in the period from 2011 to 2021 was performed in this research. In the research, the beta coefficient of selected shares was calculated with the help of the covariance of market return and stock return. The results and their statistical value were confirmed by the linear regression test. The rest of the research tests the applicability of the CAPM model to selected actions and in the same way, the SML (security market line) is devised, which is a graphical representation of the model. The research indicated that the basic assumptions of the CAPM model are not applicable as a predictor of future expected returns of selected shares on the Belgrade Stock Exchange due to various other elements that affect price movements and returns of selected shares not covered by the model.

Forecasting Performance of Different Betas: Mexican Stocks before and during the COVID-19 Pandemic

ABSTRACT This study comparatively evaluated the forecasting performance of a constant beta and two time-varying beta process specifications. Returns for 23 stocks were forecasted for several horizons in 2019–2020. The autoregressive and random walk betas showed superior forecasting performance before and during the COVID-19 pandemic, respectively. In a Diebold–Mariano test, the constant beta specification never dominated both time-varying beta models. Beta specification type should be considered when forecasting based on capital asset pricing or market models, particularly during crises. Results of rolling regressions based on arbitrage pricing theory considering other risk factors suggest time-varying systematic risk factors beyond market risks.

Evaluation of the Greenfield Investments as a Source of Sustainable Finance - Correlation between the Return on Investment(Margin%), Environmental Abstain and Levered Growth- Inferences, Synchronization through Capital Asset Pricing & Hostile Takeovers

Evaluation of the Greenfield Investments as a Source of Sustainable Finance - Correlation between the Return on Investment(Margin%), Environmental Abstain and Levered Growth- Inferences, Synchronization through Capital Asset Pricing & Hostile Takeovers

Research & Development Premium in the Indian Equity Market: An Empirical Study

This article aims to investigate the research and development (R&D) premium and explore the three most prominent asset pricing models: capital asset pricing and the three-and five-factor models (Fama & French, 1993; 2015). The results show that India's annualized average R&D premium is significantly higher than the existing value, market, profitability, size and investment premiums, implying that the R&D premium is a more significant concern for Indian investors, particularly for high R&D firms. It was also observed that by applying the GRS test and the Fama and MacBeth (1973) two-pass procedure, the R&D risk factor augmented the CAPM, FF3F and FF5F models outperforming the existing CAPM, FF3F and FF5F models, respectively. We can also report that R&D is, unquestionably, a priced ingredient and a critical factor in developing pricing models for developing markets such as India. The paper's conclusions add to the current literature in R&D and asset pricing and assist investment professionals in developing better investment and trading strategies.

Meanings Of Weighted Beta Capm Index And Beta Derminants Of Vietcombank In Vietnam During Pre-Low Inflation Time 2011-2016 In The Concept Of Sustainability

The aim of this study is to figure out the meanings of weighted beta index in bank sector and beta determinants of Vietcombank -VCB during pre-low (L) inflation period 2011-2016. In reality Vietcombank has gained many achievements but also there are certain weaknesses. Hung and Liu (2005) tested the volatility of airline betas in the capital asset pricing and three-factor pricing models, as well as exploring the potential factors affecting their values. While Fama and Frech (2004) suggest to add firm size into traditional formula of beta CAPM. The study results tell us that Market risk can increased and This may be caused by the increase in lending rate and decrease in both CPI and G (from our regression OLS). Therefore, governmental agencies need to reduce lending rate and increase GDP growth and not decreasing much CPI.

Liquidity, time‐varying betas and anomalies: Is the high trading activity enhancing the validity of the CAPM in the UK equity market?

AbstractIn the last decades, a large number of multifactor assetpricing models have emerged with the aim of correcting the estimated equity risk premiums for some well‐documented market anomalies. In any case, recent research on asset pricing shows how the higher liquidity resulting from the globalization of financial markets has significantly reduced returns tied to many strategies based on market anomalies. In this framework, questions arise about the possible renovated validity of classic assetpricing models. On this basis, in this paper we study to what extent the capital assetpricing model (CAPM) has recovered its past explanatory power. Specifically, we propose a time‐varying beta CAPM in order to control for the variable nature of beta risk to changes in the market liquidity, using the variation of the Amihud illiquidity measure to account for the degree of trading activity. We test both the time‐varying and constant beta models on different sets of anomaly portfolios for the UK equity market, and we compare their performance to that of the Fama–French three‐ and five‐factor models. Additionally, we test the constant beta model on a set of actively managed portfolios, formed according to the variation in market illiquidity in the previous year. Our results show that the pricing errors of the CAPM have significantly decreased with respect to those of previous literature. Furthermore, the time‐varying beta model performs similarly to the Fama–French models in most cases. These results are consistent with increased trading activity that reduces arbitrage opportunities and, therefore, enhances market efficiency.

The role of efficiency in capital asset pricing: a research on Nasdaq technology sector

PurposeThe aim of this study is to investigate the role of efficiency in capital asset pricing. The paper explores the impact of a four-factor model that involves an efficiency factor on the returns of Nasdaq technology firms.Design/methodology/approachThe paper relies on data of 147 firms from July 2007 to June 2017 to examine the impact of efficiency on stock returns. The performances of the capital asset pricing model (CAPM), Fama–French three-factor model and the proposed four-factor model are evaluated based on the time series regression method. The parameters such as the GRS F-statistic and adjusted R² are used to compare the relative performances of all models.FindingsThe results show that all factors of the models are found to be valid in asset pricing. Also, the paper provides evidence that the explanatory power of the proposed four-factor model outperforms the explanatory power of the CAPM and Fama–French three-factor model.Originality/valueUnlike most asset pricing studies, this paper presents a new asset pricing model by adding the efficiency factor to the Fama–French three-factor model. It is documented that the efficiency factor increases the predictive ability of stock returns. Evidence implies that investors consider efficiency as one of the main factors in pricing their assets.

The Direct and Moderating Effects of Endogenous Corporate Social Responsibility on Firm Valuation: Theoretical and Empirical Evidence from the Global Financial Crisis

AbstractResearch has produced inconclusive results concerning the effects of corporate social responsibility (CSR) on firm financial performance, with only 59 percent of studies demonstrating positive effects. Yet, still unaddressed is how CSR impacts the key driver of financial performance – firm growth. We develop new multidisciplinary theory integrating stakeholder and risk management theories with multi‐period capital asset pricing. We test the direct and moderating effects of Social, Institutional, Strategic, and Technical CSR using a simultaneous equations model of endogenous CSR and Tobin’s q ratio. Our 2004–12 sample of S&P 3000 firms show that all CSR dimensions directly bolster firm performance, while select dimensions moderate the relationship between firms’ sales or asset growth and capitalized market value in the periods surrounding the 2008 Global Financial Crisis (GFC). These results deepen understanding of how different forms of CSR influence market value, and refine estimates of CSR’s direct and moderating impacts on the growth‐value relationship.

Symmetry vs. Asymmetry, Stochastic Dominance Optimization, and The Impact on Capital Asset Pricing

Based on a novel measure of volatility-asymmetries in asset returns, we provide economic insight into the asymmetry-risk as a critical factor for investment decision making. Our approach offers a distribution-free solution to determine the portfolio efficient-frontier under stochastic dominance. It yields a utility-free portfolio separation for investors who are not only averse to symmetric risk and but also possess a diminishing risk-tolerance for asymmetric payoffs of gain/loss. In equilibrium, thus, investors require additional compensation for bearing the systematic risk associated with market volatility-asymmetries. Our model extends CAPM and rationalizes both the equity-premium and beta-anomaly puzzle.

Reexamination of Whether Accrual Quality Is a Price Factor

In this study we investigate whether accrual quality is a factor in capital asset pricing. Our analysis consists of two parts. First, we use a panel data regression that controls for cross-section fixed effects to implement the second stage of the Fama-MacBeth regression (Petersen 2009). In the second part, we use the Campbell (1991) return decomposition and vector autoregressive model (VAR) to decompose the two-stage cross-sectional regressions. This allows us to investigate whether accrual quality is a priced factor in terms of the three components of the return, which include one-period expected return, cash flow news and discount-rate news.

Effects of Credit Risk Management on Performance of Banks in Kenya

The purpose of study was to analyze the effects of credit risk management on performance of banks in Kenya. The study was guided by the following specific objective; to determine the effects of on bank performance in Kenya. Lending is an investment and therefore as the bank constructs a portfolio it considers an “efficient frontier” of optimal portfolios, offering the maximum possible expected return for a given level of risk. The study was based on modern portfolio, capital asset pricing and liquidity preference theories. It considered the credit scoring model as statistical analysis used by banks to evaluate worthiness of a borrower. The target population of interest was 44 commercial banks categorized into 28 local and 16 foreign banks. They are also categorized into small, medium and large banks. The study used census survey because of the small population. The questionnaires were administered to all respondents of commercial banks in Kenya. Piloting was done to check reliability and validity of data collection and instruments. Data was coded, edited to bring meaning. Multiple regression was also used to test the significance of one variable to the others. Additional secondary data in form of annual reports and financial statements were obtained from Central Bank of Kenya for the period 2011 to 2016. Data collected was analyzed using SPSS version 21.The null hypothesis that liquidity do not have statistically significant influence on of banks performance in Kenya was rejected. Therefore, the independent variable had significant influence on banks performance in Kenya. The bank should take into consideration potential future changes in economic conditions when assessing individual credits and their credit portfolio. The study is significant especially to decision makers involved in the implementation of credit risk management for their banks. The credit managers are able to make strategic, tactical and operational decisions based on the results of a scientific study rather than relying on trial and error.

Speculative price bubbles in urban housing markets

In the light of the unconventional monetary policies implemented by most large central banks around the world, there is an intense debate about the potential impact on the prices of capital assets. Particularly in Germany, skepticism about the sustainability of the current policy by the European Central Bank is wide spread and concerns about the emergence of a speculative price bubble in the housing market are increasing. The present study analyzes a comprehensive data set covering 127 large German cities from 1990 through 2013, using tests for speculative bubbles, both at a national and city level. Furthermore, we apply two new testing approaches: panel-data and principal components versions of explosive root tests. We find evidence for explosive price increases in many cities. However, it is only in select urban housing markets that prices decouple from their fundamental values. There is no evidence for speculative price movements nationally.

Truth and Beauty: Finance in Econophysical Translation

My recent book, Econophysics and Capital Asset Pricing: Splitting the Atom of Systematic Risk, splits beta, the capital asset pricing model’s basic unit of systematic risk, into subatomic (or “baryonic”) components, by analogy to the Standard Model of particle physics. This essay offers preliminary thoughts on the application of physics to other dimensions of finance. A more comprehensive approach would integrate Econophysics and Capital Asset Pricing’s spatial representation of comovement between individual firms, capital markets, and the real economy, with the informational and temporal dimensions of finance. This essay also places efforts at representing finance through physics in their broader scientific and aesthetic context.

Financial contagion and capital asset pricing in Africa: The impact of the 2007–09 and Euro-Zone crises on natural resources sector Beta in African emerging markets

This paper contributes to the literature by extending the interpretation of financial contagion beyond that of the market correlation approach popularised by Forbes and Rigobon (2002). Contagion is explored from the perspective of its impact on the conditional sector-risk Beta of the African Emerging Market natural resources sector. A multi-factor CAPM model is developed within a DCC-MGARCH framework to estimate time-varying Beta. We find that this reacts in different ways to different contagion events. It rose by a statistically significant 0.058 (an 8% increase) in response to the euro-zone crisis. However, with the exception of South Africa, the 2007–09 crisis was found to have no significant impact on Beta. We speculate that the differences found can be attributed to the different ways in which individual contagion events impact on individual markets. From this we conclude that ‘one size fits all’ correlations-based contagion analysis can often hide as much as it reveals.

An Analysis of Theories on Stock Returns

Objective in writing this article is to provide an overview of the theories that has been developed for stock returns which is an important area of financial markets’ researches. Since the researches in this field are very active for the past quarter, it is not possible to describe all works that has been done in this area. Most important researches will be discussed without going deeper in mathematical tools and theories.Empirical works have been showing that stock returns are predictable cross-sectional and by time. The discussions about prediction of stock price behavior started with Markowitz with his article –Portfolio Selection-. Markowitz won Nobel Prize in 1990 for his research about portfolio theory. However he criticized by many economists since implementation of the theory requires lots of effort to evaluate data and since it uses historical data the prediction will not be accurate. In addition the assumption that stock returns are normally distributed is not true in reality. Sharpe, Lintner, and Mossin independently developed a model which has come to be known CAPM (capital asset pricing model) in 1964, 1965, and 1966 respectively. Beta coefficient is a key parameter in CAPM world. Beta measures risk of an asset in relation to the market such as S&P500 or an alternative factor. Actually the CAPM is a simple model which is based on sound reasoning and some of the assumptions -all investors have the same information, information is costless, and there are no taxes transactions costs- are unrealistic in market. APT (arbitrage pricing theory) presented for a better estimation for stock returns than CAPM. CAPM is a modified theory while APT is a completely different model. APT’s multiple factors provide a better indication of asset risk and a better estimate of expected return. There are n-factors effecting stock returns in APT but the number of factors are unknown. Furthermore CAPM and APT are single-period models. To get multi-period aspects of market ICAPM was developed. After that CCAPM (consumption-oriented capital asset pricing model) was introduced. It tried to explain behavior of stock returns by a logical extension of APT. A long literature exist on prediction of stock market returns but especially after the latest financial crisis these theories must be analyzed and suggested new ideas for forecasting behavior of stock returns. Keywords: Stock Returns, Markowitz, CAPM, APT, ICAPM, CCAPM, Fama-French 3-factor model.

Foreign bias in Australia's international equity holdings

The paper uses various approaches: capital asset pricing, mean-variance, global minimum-variance, Bayes-Stein, Bayesian and multi-prior to develop foreign equity bias measures for Australia’s international equity holdings in 41 countries, over the period 2001 to 2012. Bayesian models allow for various degrees of mis-trust in the ICAPM model. Multi-Prior restricts the expected return for each asset to lie within specified confidence interval around its estimated value. Mean-Variance computes optimal weights by sample estimates of mean and covariance matrix of sample return. Bayes-Stein shrinks each asset’s historical mean return toward the return of the minimum variance portfolio and improves precision associated with estimating the expected return of each asset. The plausible sources of foreign equity bias are trade, GDP per capita, real GDP growth rate, exchange rate volatility, tax credit, stock market development, familiarity and institution variables. The paper finds that economic cost of the observed foreign bias is low. The paper analyses correlation effect on the foreign bias and finds that economic loss decreases with an increase in correlation.

The profitability of financial analysts’ recommendations: evidence from an emerging market

ABSTRACTThis article aims at measuring recommendation value on the Tunisian market and uses a hand-collected database of 6646 recommendations (2005–2009). We apply the methodology of calendar–time portfolio analysis. This consists of simulating a portfolio that would include stocks depending on the recommendations issued by financial analysts. In order to measure abnormal (or ‘excess’) returns, the raw return of the portfolio is then compared to the evolution of the stock index and to the prediction of the Capital Asset-Pricing Model. Some of the portfolios we build earn a positive significant excess risk-adjusted return of 1.19% per month. Beyond the results that are in line with the literature, we provide two original results. First, ‘sell’ signals are informative, whereas ‘buy’ signals are not. We suggest that it is related to large (small) firms having more ‘buy’ (‘sell’) recommendations and to the direction of the market trend over the period. Second, the fact that recommendation levels have more impact than recommendation changes is explained by the specific informational context on that market, which is that recommendations are systematically disclosed each month, whereas on other markets, recommendations are produced only when the analyst has some new information to disclose.