Validity Of CAPM Research Articles

Is CAPM Valid: Search for Efficient Market Portfolio

The selection of a proxy for market portfolio in CAPM model remains one of the most crucial steps in its empirical use. This paper aims to check the validity of CAPM in Indian market and to identify the most efficient proxy for market portfolio. Incorrect selection of this proxy may lead to inaccurate result and even rejection of CAPM model when tested empirically. This further emphasises the importance of selecting the correct proxy for market portfolio. The paper reviews why standard cap-weighted indices can be used as the proxy and then which ofsuch index is the most efficient proxy for the Indian market. A sample of 100 companies and has been taken to study the efficiency of four broad index namely BSE SENSEX, BSE 100, BSE 200, BSE 500 as proxy for market portfolio. The result shows that BSE 500 is a better index to be used as proxy for the market portfolio, instead of the most popular BSE Sensex, which is widely used for these kinds of studies.

Validity of CAPM & FAMA french three factor model in the Indian equity market

Validity of CAPM & FAMA french three factor model in the Indian equity market

Further evidence on the validity of CAPM: The Warsaw Stock Exchange application

Further evidence on the validity of CAPM: The Warsaw Stock Exchange application

An Empirical Examination of the CAPM on BSE SENSEX Stocks

Investment plays a significant role in the modern economy. The investor understands the importance of investment in wealth creation. But real causing problem for investor is prediction of risk to have assured return in each company shares. It has understood that minimizing the systematic risk is always difficult than unsystematic risk. If we look in to the earlier study done by many researchers, we find that CAPM model would be right technique to know the risk and return relationship in any stock. With the point of view of significance and reliability of CAPM model, we have used CAPM techniques to conclude the results. The first model developed by William Sharpe and other scholars supporting to this model has been used to test the results. This study investigates the validity of CAPM on BSE 30 companies from BSE website. The study considered closing price of 30 companies of BSE stock market from January 2009 to December 2018.

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

Conditional CAPM Using Expected Returns of Brazilian Sustainability Companies

In the last decades, CAPM model has been of great interest in the scientific scene. Despite all the criticism, the improvement of the static CAPM, which has generated new dynamic models, provided investors with stronger guarantee through financial transactions. The CAPM and its static version were and are still very important in the financial scene. Nowadays, more sophisticated adaptations of the CAPM are found, which allow us to explain some matters in finance that had remained unqualified for a couple of time. Considering such discussion about the CAPM validity, this study aims to create a basis for reflection upon the conditional model, comparing it with the static one. In order to verify such facts, tests of conditional models are examined (with beta varying throughout the exercise), something uncommonly studied in the literature. Such tests are suitable to incorporate variances and covariance that change at long run. Methodological wise, the study tested the conditional CAPM model borrowing a leaf from Jagannathan and Wang using macroeconomics and financial variables from the Brazilian sustainability Companies. Based on our findings, there is evidence that the conditional CAPM of Jagannathan and Wang for the North American market is perfectly applicable to the Brazilian sustainability Companies.

Review and Validity of Capital Asset Pricing Model: Evidence from Pakistan Stock Exchange

Since the inception of prospects theory of Markowitz (1952) which leads to the development of CAPM has been studied and applied in many ways. Some researchers conclude that CAPM is valid and could be used for valuation of securities and cost of equity. However, critiques arise that CAPM is a single risk factor and remark that a single factor model cannot be generalized in the overall capital markets because the capital market absorbs many other risk factors. The CAPM has been applied to the Pakistan’s Stock Exchange to check the validity of CAPM for a sample of 306 individual firms and 18 industrial portfolios. Two pass regression has been applied to check the applicability of CAPM in Pakistan’s stock exchange. The results show that CAPM, single factor model is not valid for the technical analysis in Pakistan's capital market. The investors need to use other type of factor models which include other economic and non economic kind of variables for valuation of securities.

The Impact Of Penny Stocks On The Pricing Of Companies Listed On The Warsaw Stock Exchange In Light Of The CAPM

Abstract Oryginality and objective – Research on the pricing of stocks listed on developed markets shows inexplicable deviation from the pricing that could be observed with CAPM validity. A similar anomaly is found on the Polish market. Reasons for inconsistent pricing with CAPM are unknown, and they are the main objective of this research. Method – The study is conducted using stocks listed on the Warsaw Stock Exchange in 1995–2012. Quintile stock portfolios are formed on the basis of strategies widely used by investors. The study is carried out in several modes. In the subsequent modes penny stocks with the market values below 0.5, 1.5, 5.0 and 15.0 PLN are eliminated. Results – It is conjectured that both penny stocks and improper procedures for the test portfolios forming contribute to inconsistent stock pricing in light of the CAPM. The studies show that results are in line with the extended conjectures. Also, study results indicate that speculative stocks are mostly penny stocks, however, it is not possible to explicitly state that penny stock are speculative.

Accounting‐based Risk Management and the Capital Asset Pricing Model: An Empirical Comparison

Accounting‐based risk management (ABRM) is a theoretically consistent and practical tool for calculating the cost of capital from underlying financial ratios. In this paper, a sample of ABRM‐generated discount factors is used to generate risk‐adjusted returns, which are compared to CAPM equivalent discount factors. In view of the debates about CAPM's validity, alternative models, the nature and scale of the equity risk premium, and the importance of discount rates in capital budgeting and asset valuation, ABRM's characteristics and resulting discount rates offer a potentially useful alternative. Results suggest that although average discount rates are comparable, their cross‐sectional distributions are dissimilar, so that investors in an average risky firm are overcompensated for systematic risk when using CAPM discount rates, because CAPM discount factors overestimate risk arising from fixed costs in most firms.

Conditional CAPM using expected returns of Brazilian new market (corporate governance)

In the last decades, CAPM model has been of great interest in the scientific scene. Despite all the criticism, the improvement of the static CAPM, which has generated new dynamic models, provided investors with stronger guarantee through financial transactions. The CAPM and its static version were and are still very important in the financial scene. Nowadays, more sophisticated adaptations of the CAPM are found, which allow us to explain some matters in finance that had remained unqualified for a couple of times. Considering such discussion about the CAPM validity, this study aims to create a basis for reflection upon the conditional model, comparing it with the static one. In order to verify such facts, tests of conditional models are examined (with beta varying throughout the exercise), something uncommonly studied in the literature.

Can We Use Historical Mean Returns?

The negative average realized returns, specially in Tokyo Stock Exchange during early 90s and 2000s, has triggered the arguments on the controversial use of realized return in asset pricing tests further. Recently many researchers are arguing on the alternative measure of the expected return. The reason behind the failure of the realized returns has remained unanswered, however. In the text books, the authors treat realized returns as a sample of return. We argue that realized returns cannot be the sample of returns. We redefined realized returns and the ex-post returns; and showed that the realized returns cannot be the ex-post realization of the ex-ante expectations of returns. Our paper is the first to explain the difference between the ex-post and the realized values; and also the first to present the reason behind the inability of the realized return as the ex-post realization of the ex-ante predictions.We focused on the reason behind the failure of the realized return as an estimator for the expected return. Other researchers also argued on the inability of the realized return, all of they implicitly assumed realized return as the sample of returns. We went to the basic of the asset-pricing model and showed that realized return cannot be a sample of return. Through simple graphical explanation, we can show the validity of CAPM although the average realized return is negative.

Testing Of CAPM In An Emerging Economy: “A Case Study of Pakistan”

The theme of this paper is to test the validity of the Capital Asset Pricing Model of Sharpe [1964] and Lintner [1965] version which is considered as a standard Asset Pricing Model and generally performs poorly in both developed and emerging markets. For this purpose, 45 companies have been selected randomly which are listed at Karachi Stock Exchange. Their daily share price data for a period of five years have been analyzed in order to test the validity of CAPM in an emerging economy taking a case of KSE-100 index. The research finding concludes that CAPM version of Sharpe [1964] and Lintner [1965] is still one of a useful method for estimating the cost of equity capital in an emerging market as from the selected sample of forty five companies, the values of beta for thirty seven companies are found significant which proved that beta is still a useful measure of risk in an emerging market like Pakistan

Can We Use Historical Mean Returns?

Recently tests of the CAPM are on the alternative proxies for the expected return as researchers believe that average realized return is an extremely poor proxy for the expected return. Like other researchers, we also believe on the failure of average realized return as an estimate for expected return. Unlike others, we believe that the inability of average realized return to explain risk-return relationship has led to this controversy. Besides, the differences in the information sets hinder realized return to be the ex-post realization of the ex-ante expectations. We argue that considering realized return as a sample of returns is misleading as we explain the differences between ex-post value and the realized return. If pricing is rational, we can show the validity of CAPM even when empirical tests deny CAPM.

The non-relevance of the elusive holy grail of asset pricing tests: The “true” market portfolio does not alter CAPM validity conclusions

Abstract Empirical evaluations of CAPM usually attach a caveat that rejection is conditional on the choice of market proxy. We explore the criticality of the proxy choice disclaimer. Using different proxies and comprehensive simulations of the unobserved “true” market in Fama–MacBeth tests of CAPM, we find that the significance ( t -statistics) corresponding to betas remain consistently unaltered, even if the proxy is a small fraction of or has a low correlation with the true market. The constancy of t -statistics persists in a simulated true-CAPM world as well: if CAPM is indeed valid, the choice of proxy is unlikely to reject it erroneously. Identity of the elusive true market portfolio and the choice of representative proxy cannot overturn conclusions on validity of CAPM based on Fama–MacBeth tests. Roll’s Critique, incontrovertible in theory, may be quite forgiving in practice – CAPM cannot be resurrected by a “closer” approximation of the elusive true market portfolio when it has commonly been rejected.

Empirical test of conditional CAPM using expected returns of Brazilian, Argentinean, German and United States of American portfolio

In the last decades, CAPM model has been of great interest in the scientific scene. Despite all the criticism, the improvement of the static CAPM, which has generated new dynamic models, provided investors with stronger guarantee through financial transactions. The CAPM and its static version were and are still very important in the financial scene. Nowadays, more sophisticated adaptations of the CAPM are found, which allow us to explain some matters in finance that had remained unqualified for a couple of time. Considering such discussion about the CAPM validity, this study aims to create a basis for reflection upon the conditional model, comparing it with the static one. In order to verify such facts, tests of conditional models are examined (with beta varying throughout the exercise), something uncommonly studied in the literature. Such tests are suitable to incorporate variances and covariance that change at long run. Methodological wise, the study tested the conditional CAPM model borrowing a leaf from Jagannathan and Wang (1996) using macroeconomics and financial variables from the Brazilian, German and Argentinean markets. Also, the approach compared such results with the American figures. Based on our findindings, there is evidence that the conditional CAPM of Jagannathan and Wang (1996) for the North American market is perfectly applicable to the Brazilian, Argentinean and German markets.

Testando o CAPM condicional nos mercados brasileiro e norte-americano

Nas ultimas décadas o modelo CAPM tem despertado grande interesse por parte da comunidade científica. Apesar das críticas, o aprimoramento do CAPM estático, dando origem a novos modelos dinâmicos, traz maior segurança para o investidor ao longo do ciclo de negócios. O CAPM e suas versões estáticas foram e são de grande importância em finanças. Nos dias de hoje, encontramos adaptações mais complexas do modelo CAPM, as quais nos permitem ter respostas sobre questões em finanças que, por muito tempo, permaneceram não solucionadas. Diante deste panorama e considerando toda essa grande discussão acerca da validade do CAPM, este trabalho procura apresentar as vantagens dos modelos condicionais em relação ao modelo estático. Para constatar tais fatos estudar-se-ão os testes dos modelos condicionais (beta variando ao longo do tempo), que não são comumente estudados na literatura. Esses testes são convenientes para incorporar variâncias e covariâncias que se alteram ao longo do tempo. Dentre os testes dos modelos condicionais destacamos o de Jagannathan e Wang (1996). Conclui-se que esse modelo explica satisfatoriamente a variação cross-sectional dos retornos do mercado brasileiro e norte-americano.

Have we Misinterpreted CAPM for 40 years? A Theoretical Proof

The validity of CAPM has been contingent on its security market line hypothesis, which asserts that higher-beta-risk assets should carry higher expected returns. Owing to a lack of empirical support for that hypothesis, many have declared CAPM dead. However, by surrogating assets' following-period ex-post returns as asset expected returns, most empirical studies have misinterpreted CAPM. This paper shows that higher-beta-risk assets will not necessarily generate higher or lower ex-post returns and that CAPM is such a common sense theory that one can literally observe its ex-post return paradigms at work in the daily capital marketplace.