CAPM Model Research Articles

Stock pricing in Latin America: The synchronicity effect

This paper investigated whether the stock price synchronicity level (SPSL) is a pricing factor in the Latin American scenario. To do so, the shares with the highest liquidity level listed in the stock exchange in five Latin American (LA) countries (Argentina, Brazil, Chile, Mexico and Peru) were used. The results indicated that the SPSL is associated with a positive premium. This premium was obtained by the CAPM model and by the Fama-French three- and five-factor models. There was evidence that the average SPSL increases in periods of greater turmoil in the financial markets. Moreover, it was found that the SPSLs are not associated monotonically with the efficiency levels of stock prices. Overall, the use of the SPSL factor in asset pricing models reduced the bias in estimating the stock premiums in LA.

Do Large Blockholders Reduce Risk?

The conventional assumption in the asset pricing literature is that the identity of a company's owners is largely irrelevant, but studies of companies with “blockholders”—shareholders with large positions in a particular company—provide grounds for questioning this assumption. Unlike the well‐diversified investors of modern portfolio theory, blockholders have strong incentives to monitor corporate performance and, when necessary, to exert control over ineffective managements and boards. The findings of many studies support the idea that blockholders have a positive effect on rates of return.The authors of this article report the findings of their recent investigation of whether blockholders might also have a positive effect on shareholder value by reducing the risk of the companies in which their holdings are concentrated. After distinguishing between companies with individual as opposed to corporate blockholders, and those with one share, one vote as opposed to those with dual‐class shares, the authors find that ownership of large positions by individuals—but not corporations—was associated with lower systematic risk (when using both Fama‐French multiple factor and CAPM models). At the same time, they find that the firm‐specific risk of such companies was higher, but “biased” toward positive outcomes—that is, smaller downsides with larger upsides. What's more, this upward shift in performance and risk‐profile was achieved at least partly through increases in productivity as reflected in higher profit margins, profitability, profit per employee, and operating leverage, and lower costs of goods sold, SGA, and cash holdings. By contrast, in the case of blockholders in companies with dual‐class share structures, all of these positive associations with blockholders were either significantly weaker, or reversed. That is, whereas the presence of individual blockholders appears to increase productivity and value under a one share, one vote governance regime, blockholders in companies with dual‐class structures were associated with higher systematic risk and reduced productivity and value.

Heterogeneous tail generalized COMFORT modeling via Cholesky decomposition

A mean–variance heterogeneous tails mixture distribution is proposed for modeling financial asset returns. It captures, along with the obligatory leptokurtosis, different tail behavior among the assets. Its construction allows for joint maximum likelihood estimation of all model parameters via an expectation–maximization algorithm and thus is applicable in high dimensions. A useful and unique feature of the model is that the tail behavior of the individual assets is driven by asset-specific news effects. In the bivariate iid case, the model corresponds to the standard CAPM model, but enriched with a filter for capturing the news impact associated with both the market and asset excess returns. An empirical application using a portfolio of highly tail-heterogeneous cryptocurrencies and realistic transaction costs shows superior out-of-sample portfolio performance compared to numerous competing models. A model extension to capture asset-specific asymmetry is also discussed.

Main Regulations of CAPM Model and Its Modern Modification

Main Regulations of CAPM Model and Its Modern Modification

Testing the overreaction hypothesis in the mexican stock market

<p>The objective of this work is to test the overreaction hypothesis in the Mexican Stock Market for the period of 2002-2015, using monthly data and applying the Cumulative Average Residuals (CAR) methodology via the CAPM model and the three-factor model proposed by Fama and French. The CAR model is applied to test how winner and loser portfolios perform during the period under analysis. Overall, the evidence shows that average CAR for the loser portfolio is 0.706%, whereas CAR for the winner portfolio is 0.364%, and that are statistically different; nevertheless, both portfolios are co-integrated. This research contributes to the financial literature identifying overreaction in the Mexican Stock Market during the period examined.</p>

Risk Premium for Loss of Employment within Region

On the basis of the income-based valuation method of intellectual capital of the region in the previous papers, the author discovers a need for a valuation of the risk premium which should be included in the rate that discounts income from work. Undoubtedly, both the loss of employment and the amount of income from work contribute to the intuitive calculation in the economic migration. The income-based valuation of the right to a certain sequence of income at a certain risk level properly integrates these factors as one value, providing a clear criterion of selection. Due to the fact that the labour market does not generate the values that allow the adaptation of the CAPM model, there was offered the original method of the risk premium valuation which provides the results analogous to those based on the CAPM model, and it was applied for the particular provinces in Poland. As a result, there was revealed the equity premium puzzle of the Polish labour market. Because of the significant amount of estimates, the obtained results are the first step towards the problem.

Portfolio selection in euro area with CAPM and Lower Partial Moments models

This article selects portfolios using estimates given by CAPM and three Lower Partial Moments models (LPM). The CAPM assumption about investors’ behaviour towards risk is that they are equally concerned with upside and downside risk. The LPM models, however, are based on the assumption that investors’ utility functions weight downside risk more heavily than upside risk. The major difference between LPM models is their definition of upside and downside risk. The asset pricing models estimations and the corresponding portfolio selection were conducted on several euro area domestic stock indexes and the European Monetary Union stock market index (EMU). A pairwise comparison of portfolio performance is conducted through Sharpe ratios calculated separately for upside and downside market conditions. The results of this comparative analysis of different pricing models provide evidence that CAPM and one LPM model offer better protection against adverse market conditions than the other two LPM models studied.

Testing asset pricing models on the Pakistan Stock Exchange

This study investigates the performance of CAPM, three-factor and five-factor asset pricing models on the Pakistan Stock Exchange using monthly data of 896 companies from November 2000 to December 2016. The results from the time-series approach show that the three-factor model performs relatively better than the CAPM and the five-factor model, whereas the cross-sectional approach establishes the superiority of the five-factor model. It can thus be concluded that it is important to incorporate factors, such as size, value, profitability and investment when predicting returns on securities in the Pakistan Stock Exchange.

KOSZT KAPITAŁU I STRUKTURA KAPITAŁOWA PRZEDSIĘBIORSTW BRANŻY MIĘSNEJ NOTOWANYCH NA GIEŁDZIE PAPIERÓW WARTOŚCIOWYCH W WARSZAWIE – DYSKUSJA NA TEMAT PROBLEMU WYCENY

The cost of capital is an important parameter in the assessment of efficient use of sources for business financing. This is also a measure enabling the indirect verification of the basic aim of the company’s long-term business operations – an increase in value. So far, not fully transparent model of evaluating the cost of equity, both in theory and practice, has been developed. As a result, estimations concerning the cost of capital and value of companies are to a large extent subjective. The research – using the CA PM model together with its accepted parameters – proves the stability and precision of the applied methodology. Estimating the cost of capital is of special significance in companies from the Polish meat industry. These entities (in the years under investigation) were obliged to increase investment expenditures as a result of Poland’s accession to the European Union and the necessity to adjust to western-European standards and further consolidation – both in the vertical and horizontal dimensions. Pro-developmental activities required changes in sources of finance and as a result – changes in capital structure. The dilemma concerning “safer” yet more expensive equity, or “cheaper” yet less stable foreign (interest) capital remains unsolved to this day.

Comparison of Risk Index Estimating Methods on the Polish Financial Market

Abstract The purpose of this paper is to determine a practical approach of calculation of the systematic risk of companies in line with the CAPM model. By performing an analysis of the methodology used in practice of determining the beta and review of the literature on the subject the accounting rules that make the best possible impact on the change in the level of risk index are determined. In this work on the Polish financial market are also carried out simulations showing the impact of the change in assumptions on the final amount of beta. Based on the empirical results there is a recommendation formulated as to what method should determine beta for public companies using the CAPM model. These boundary conditions are also possible implementations of the proposed approach and possible desirable solutions, if minimum boundary conditions are not met. The defined scope for the use of the recommended method of calculating the risk index allows us to reduce the error probability of over-or underestimation of the value of the index.

Modified Fama-French Three-Factor Model and the Equity Premium: An Empirical Test in the Chinese Stock Market

Fama-French model is proposed as an alternative to the CAPM model to explain the equity premium found in stock market. This paper applies the original and modified Fama-French three-factor model in three industries (Finance & Insurance, Real Estate, and Pharmaceutical) of China’s Shanghai Stock Exchange market. The study examines the relation between risk premium and the three Fama-French factors using six portfolios sorted by market capitalization and book-to-market ratio (inverse of price-to-book ratio). The result shows that Fama-French factors have consistent explanatory power of the risk premium. Using the original Three-Factor Model and CAPM Model as reference, the modified Three-Factor Model, with cross and quadratic terms added, significantly improves the performance of the model.

On the ability of New Zealand actively managed funds to generate outperformance in their domestic equity allocations

Purpose This paper aims to assess the ability of New Zealand (NZ) actively managed funds to generate risk-adjusted outperformance using portfolio holdings data. Focusing on domestic equity allocations addresses the benchmark selection issue, particularly for funds with national and international exposures. Design/methodology/approach The authors assess performance using several asset pricing models including the CAPM, three-factor and four-factor models. The authors also assess performance across funds with different characteristics such as fund size, size of local holdings, type of fund provider, past returns and fees. The authors further examine whether funds engage in any stock-picking or market timing by considering the active share and tracking error. Findings The returns on NZ equity holdings of NZ actively managed funds from 2010 to 2017 provide little evidence of risk-adjusted outperformance and stock-picking skill. These exposures yield pre-cost returns that have a nearly perfect correlation with the market index and an insignificant alpha. Funds show little tendency to bet on any of the main characteristics known to predict stock returns, such as size, book-to-market and momentum. In addition, the authors show that the average active shares and tracking errors are low, suggesting that the majority of funds hold NZ equity portfolios that closely mimic the market index. Originality/value Existing studies rely on returns data which aggregate performance across all asset classes with varying exposures. This may lead to benchmark selection issues (particularly for funds with international exposures) which may obscure the fund manager’s true stock-picking skills. Assessment using holdings data would enable suitable performance measurement by researchers and industry analysts.

Short-term contrarian and sentiment by traders’ types on futures markets

PurposeThe purpose of this paper is to investigate whether the interaction between sentiments and past prices can lead to higher abnormal profit in futures markets. Such examinations allow the authors to relate the paper to the debate that focuses on examining the behavior of different types of traders in futures market, and who among these traders destabilize the markets.Design/methodology/approachFirst, the authors develop new dynamic strategies in US futures market that combine sentiment by type of traders based on trader position provided by the Disaggregated Commitments of Traders with short-term contrarian signals. Next, the authors adjust the abnormal profits to the CAPM model and Miffre and Rallis’s (2007) model. Finally, the authors use the Du (2012) decomposition methodology.FindingsThe main findings are that the abnormal profit is more pronounced when the authors combine past returns with lagged high producer/merchant/processor/user or low managed money sentiment. The results from swap dealer or other reportable groups show that there is no pervasive directional relation between their sentiment and contrarian profit. A further investigation of the sources of abnormal profits demonstrates that these profits survive even after the adjustment of obtained return to risk. Instead, these profits are mainly due to the overreaction to the news by irrational traders.Originality/valueBased on behavioral finance theories, the authors conclude that producer, merchant, processor and user behave like irrational traders, while managed money traders behave like rational ones. Given that current regulatory proposes the limitation of speculation, the policy implications of these results are important. Therefore, these findings suggest that policy distinctions on trading motives may be more challenging to construct than ever.

Statistical Analysis and CAPM Model for Investments in Georgia’s Energy Sector

Various types of recent research point out the fact that Georgia’s energy sector (the hydro energy one, in particular) is one of the most attractive ones when it comes to investment opportunities. Hydro power remains the cheapest and the most “eco-friendly” source of power for Georgia. An essential part of Georgia’s hydro energy potential is still untapped (in fact, the current electricity generation represents just about 40% of Georgia’s estimated annual hydropower output potential). At the same time, it is worth mentioning that for the last 6 years, generation capacities are falling short of growing consumption and this fact increases the attractiveness of investing in this sector. Currently, more than 20 hydro power plants are under construction/reconstruction orlicensing stage and, in addition to this, the Ministry of Energy of Georgia has more than 60 HPP projects available for investment. For every potential investor, it is of vital importance to have a general knowledge about what to expect from the desired sector, what are the risks that could hurt the success of the investment and if the expected rate of return equals or exceeds his or her required rate of return. This article, based on various official data, offers introductory issues of investment analysis of small hydro power plants in Georgia and based on well known methods of Modern Portfolio Theory offers the suitable model for investments evaluation and analysis in Georgia’s Energy sector.Keywords: CAPM, energy sector, investment, statisticsJEL: C13

Exhibiting Abnormal Returns Under a Risk Averse Strategy

This paper is devoted to the investment strategies that combine asset pricing models and coherent risk measures. In particular, we utilize the theoretical framework of Balbas et al. (J Risk 18(4):25–52, 2016), which suggests that simply by managing a portfolio of assets, an investor can achieve risk that converges to −∞ and returns that converge to + ∞. We contribute on that framework by providing evidence that arise from the CAPM model, in regard to the efficient market hypothesis. In addition, our results suggest that an investor can exhibit returns that outperform the market index by managing a portfolio less volatile than the market.

Cross Section of KOSPI Returns Based on Cash Flow Risk Factors

This paper introduces two risk factors which are the covariance between long-run consumption growth and cash flows and the duration of cash flow, and investigates how these factors serve to explain the KOSPI return risk premiums. Based on our empirical results comparing the proposed two-factor cash flow model with the standard benchmark models such as CAPM and Fama-French 3-factor model (FF-3F), using KOSPI equity including de-listed stocks, the cash flow model explains 74.7% of the cross-section of equity risk premium while CAPM and FF-3F model explains 41.9% and 64.1% to the maximum, respectively, showing that the cash-flow model is superior in explaining the risk premium factor structure compared with the benchmark models. Also, the pricing error is only 4% in the two-factor cash flow model, while CAPM and FF-3F are 7.7% and 4.7%, respectively, indicating the cash flow model outperforms the standard benchmark models in pricing error as well. These results can be interpreted that the cross section of the equity risk premium is related to a firm’s cash flow and long-run consumption, and therefore the growth rate of consumption in the long run rather than contemporaneous consumption growth rate has a greater influence on the determination of the risk premium.

Stock Return Predictability in Central and Eastern European Countries

We investigate the stock return predictability for the aggregate Central and Eastern European (CEE) markets from 1998 through the mid-2017. Using the firm-level data we construct country portfolios and sets of component portfolios: 10 industry portfolios, 10 size portfolios, 10 market-to-book portfolios. Predictive regressions with various fundamental variables and technical indicators are conducted. In-sample and out-of-sample tests highlight return predictability across different portfolios. Out-of-sample decomposition of predictability shows that time-varying macroeconomic risk premium can be captured by the conditional CAPM model.

Current Issues in Assessment of Risks Related to Investment Projects

The definition of the essence of an object of management in economics is an indispensable component of professional risk management. Since the national risk management theory is just being formed, the need to find a clear and comprehensive definition for the notion "risks" is especially topical. Capital valuation is one of the most important issues, which needs to be solved by companies during ROI studies. This article makes an attempt to study the role of risk management in the implementation of investment projects. The main purpose of this article is to identify the main regularities which determine the peculiarities of risk assessment in business, being the key element facilitating the organization of investment projects. The objectives have been as follows: to review the basic concepts of risk management; to study its components in business; to reflect the system and risk management principles, and to carry out risk assessment; to consider the main kinds of risks in the business area.The article describes various types of investment and project risks, risk analysis methods for investment projects, as well as efficiency indicators of investment projects, and provides an analysis of risk factors and uncertainties during the development of investment projects. The peculiarities of the practical use of project risks’ analysis methods have been studied. Risk assessment methods for an investment project help evaluate its feasibility, the time within which it will start being profitable, as well as the probabilistic volume of its future profits. Investment project valuation models have been analyzed, in particular, the CAPM model for emerging capital markets. The DCF method has been studied, being the base for assessing the attractiveness of business in general and a company's investment project in particular.

Validity of CAPM by Using Portfolios: Evidence from Indian Capital Market

This article tests the validity of Capital Asset pricing Model and compares the results of 16 periods including 14 sub periods which comprises 3 years each for the prediction of the expected returns in the Indian capital Market. The tests were conducted on portfolios having different security combinations. By using Black Jenson and Scholes methodology (1972) the study tested the validity of the model for the whole and different sub periods. The study used daily data of the BSE 100 index for the period from January 2001 to December 2010. Empirical results mostly in favor of the standard CAPM model. However, the result does not find conclusive evidence in support of CAPM

Les Modèles Factoriels Appliqués au Cas de la Bourse Régionale des Valeurs Mobilières

This study tests and compares the classical factorial models applicable on the BRVM market. These are the CAPM, Fama and French and CAPM models with liquidity. Our analysis covers a daily frequency from September 16, 1998 to December 31, 2016. We have subdivided our study into ex ante and ex post periods. The first step uses time series regression to estimate the parameters of these models. The second step is to use these in cross-sectional regression. This approach technique allowed us to rank the models according to their ability to predict the return of securities on the BRVM market. The results of our study gave us the predominance of the CAPM model followed by the Fama and French model. The CAPM with liquidity is not efficient for the good reason that this market is not liquid.