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1 – 10 of over 1000
Book part
Publication date: 4 December 2012

William Coffie and Osita Chukwulobelu

Purpose – The purpose of this chapter is to examine whether or not the Capital Asset Pricing Model (CAPM) reasonably describes the return generating process on the…

Abstract

Purpose – The purpose of this chapter is to examine whether or not the Capital Asset Pricing Model (CAPM) reasonably describes the return generating process on the Ghanaian Stock Exchange using monthly return data of 19 individual companies listed on the Exchange during the period January 2000 to December 2009.

Methodology/approach – We follow a methodology similar to Jensen (1968) time series approach. Parameters are estimated using OLS. This study is designed to measure beta risk across different times by following the time series approach. The betas of the individual securities are estimated using time series data of the excess return version of the CAPM.

Findings – Our test results show that although market beta contributes to the variation in equity returns in Ghana, its contribution is not as significant as predicted by the CAPM, and in some cases very weak. Our results also reject the strictest form of the Sharpe–Lintner CAPM, but we found positive linear relationship between equity risk premium and market beta. Instead, our evidence uphold the Jensen (1968) and Jensen, Black, and Scholes (1972) versions of the CAPM.

Research limitations/implications – This study is limited to the single-factor CAPM. Future studies will extend the test to include both size and BE/ME fundamentals and factors relating to P/E ratio, momentum and liquidity.

Practical implications – Our results will make corporate managers to be cautious when using CAPM as a basis to determine cost of equity for investment appraisal purposes, and fund managers when evaluating asset and portfolio performance.

Originality/value – The CAPM is applied to individual securities instead of portfolios, since the model was developed using information on a single security.

Details

Finance and Development in Africa
Type: Book
ISBN: 978-1-78190-225-7

Keywords

Article
Publication date: 20 January 2020

Mohamad Hafiz Hazny, Haslifah Mohamad Hasim and Aida Yuzy Yusof

The capital asset pricing model (CAPM) is the most widely used asset pricing model that measures risk–return relationship. The CAPM is based on Markowitz’s mean variance…

Abstract

Purpose

The capital asset pricing model (CAPM) is the most widely used asset pricing model that measures risk–return relationship. The CAPM is based on Markowitz’s mean variance analysis. The advancement of Islamic finance leads to the question whether or not the practice of modern investment theories and analyses such as the Markowitz’s mean variance analysis and CAPM are in accordance to shariah and could be used in pricing Islamic financial assets. Therefore, this paper aims to present a review of the CAPM and to discourse the set of assumptions underlying the model in terms of shariah compliance.

Design/methodology/approach

Although most of the assumptions are not contradictory to shariah principles, there are Islamic variables such as prohibition of short selling, purification and zakat that should be taken into consideration when pricing Islamic financial assets. We then develop a mathematical model which is a modification of the traditional CAPM that incorporates principles of Islamic finance and integrating zakat, purification of return and exclusion of short sales.

Findings

As a proof-of-concept, this paper presents the results of an empirical study on the proposed shariah-compliant CAPM in comparison to the traditional CAPM. The results show that the proposed Islamic CAPM is appropriate and applicable in examining the relationship between risk and return in the Islamic stock market.

Originality/value

This study contributes to existing body of knowledge by presenting an algorithm and mathematical derivation of the shariah-compliant CAPM which has been lacking in the literature of Islamic finance. The paper offers a novel approach in pricing Islamic financial assets in accordance to shariah, advocated by modern investment theories of Markowitz’s mean variance analysis and CAPM.

Details

Journal of Islamic Accounting and Business Research, vol. 11 no. 1
Type: Research Article
ISSN: 1759-0817

Keywords

Book part
Publication date: 23 December 2005

David Ng and Mehdi Sadeghi

This paper studies the empirical application of an asset pricing model derived from the irrational individual behavior of loss aversion. Previous research using loss…

Abstract

This paper studies the empirical application of an asset pricing model derived from the irrational individual behavior of loss aversion. Previous research using loss aversion asset pricing finds conclusive evidence that estimations match market equity premium and volatility using simulation data. We find that within its empirical application, the estimated errors are comparable to errors estimated from the capital asset pricing model. This study of the correlations between rational and irrational asset pricing model from the empirical results finds validity for both estimated values. Finally, we see the importance of cultures, economic development and financial development on asset pricing through an empirical examination of five pacific-basin countries in the estimation of asset pricing models.

Details

Asia Pacific Financial Markets in Comparative Perspective: Issues and Implications for the 21st Century
Type: Book
ISBN: 978-0-76231-258-0

Article
Publication date: 1 March 2006

Philip Gharghori, Howard Chan and Robert Faff

Daniel and Titman (1997) contend that the Fama‐French three‐factor model’s ability to explain cross‐sectional variation in expected returns is a result of characteristics…

Abstract

Daniel and Titman (1997) contend that the Fama‐French three‐factor model’s ability to explain cross‐sectional variation in expected returns is a result of characteristics that firms have in common rather than any risk‐based explanation. The primary aim of the current paper is to provide out‐of‐sample tests of the characteristics versus risk factor argument. The main focus of our tests is to examine the intercept terms in Fama‐French regressions, wherein test portfolios are formed by a three‐way sorting procedure on book‐to‐market, size and factor loadings. Our main test focuses on ‘characteristic‐balanced’ portfolio returns of high minus low factor loading portfolios, for different size and book‐to‐market groups. The Fama‐French model predicts that these regression intercepts should be zero while the characteristics model predicts that they should be negative. Generally, despite the short sample period employed, our findings support a risk‐factor interpretation as opposed to a characteristics interpretation. This is particularly so for the HML loading‐based test portfolios. More specifically, we find that: the majority of test portfolios tend to reveal higher returns for higher loadings (while controlling for book‐to‐market and size characteristics); the majority of the Fama‐French regression intercepts are statistically insignificant; for the characteristic‐balanced portfolios, very few of the Fama‐French regression intercepts are significant.

Details

Pacific Accounting Review, vol. 18 no. 1
Type: Research Article
ISSN: 0114-0582

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Article
Publication date: 4 September 2007

Don U.A. Galagedera

The main aspect of security analysis is its valuation through a relationship between the security return and the associated risk. The purpose of this paper is to review…

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Abstract

Purpose

The main aspect of security analysis is its valuation through a relationship between the security return and the associated risk. The purpose of this paper is to review the traditional capital asset pricing model (CAPM) and its variants adopted in empirical investigations of asset pricing.

Design/methodology/approach

Pricing models are discussed under five categories: the single‐factor model, multifactor models, CAPM with higher order systematic co‐moments, CAPM conditional on market movements and time‐varying volatility models.

Findings

The paper finds that the last half‐century has witnessed the proliferation of empirical studies testing on the validity of the CAPM. A growing number of studies find that the cross‐asset variation in expected returns cannot be explained by the systematic risk alone. Therefore a variety of models have been developed to predict asset returns.

Research limitations/implications

There is no consensus in the literature as to what a suitable measure of risk is, and consequently, as to what is a suitable measure for evaluating risk‐adjusted performance. So the quest for robust asset pricing models continues.

Originality/value

From its beginning to its possible demise the paper reviews the history of the CAPM assuring that we are all up to speed with what has been done.

Details

Managerial Finance, vol. 33 no. 10
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 3 April 2017

James R. DeLisle and Terry V. Grissom

The purpose of this paper is to investigate changes in the commercial real estate market dynamics as a function of and conditional to the shifts in market state-space…

Abstract

Purpose

The purpose of this paper is to investigate changes in the commercial real estate market dynamics as a function of and conditional to the shifts in market state-space environment that can influence agent responses.

Design/methodology/approach

The analytical design uses a comparative computational experiment to address the performance of property assets in the current market based on comparison with prior structural patterns. The latent variables developed across market sectors are used to test agent behavior contingent on the perspectives of capital asset pricing conditionals (CAPM) and a behavioral momentum/herd construct. The state-space momentum analysis can assist the comparative analysis of current levels and shifts in property asset performance given the issues that have arisen with the financial crisis of 2007-2009.

Findings

An analytic approach is employed framed by a situation-dependent model. This frame considers risk profiles characterizing the perspectives and preferences guiding a delineated market state. This perspective is concerned with the possibility of shifts in market momentum and representativeness conditioning investor expectations. It is observed that the current market (post-crisis) has changed significantly from the prior operations (despite the diversity observed in prior market states). The dynamics of initial findings required an additional test anchored to the performance of the general capital market and the real economy across time. This context supports the use of a modified CAPM model allowing the consideration of opportunity cost in a space-time dynamic anchored with the consideration of equity, debt, riskless asset and liquidity options as they varied for the representative agents operating per market state.

Research limitations/implications

This paper integrates neoclassical and behavioral economic constructs. Combines asset pricing with prospect theory and allows the calculation of endogenous time-preferences, risk attitudes and formulation and testing of hyperbolic discounting functions.

Practical implications

The research shows that market structure and agent behavior since the financial crisis has changed from the investment and valuation perspectives operating as observed and measured from 1970 up to 2007. In contradiction to the long-term findings of Reinhart and Rogoff (2008), but in compliance with common perspectives and decision heuristics often employed by investors, this time things have changed! Discounting and expected rates of return are dynamic and are hyperbolic and not constant. Returns and investment for property assets are situational (market state-space specific) and offer a distinct asset class, not appropriately estimated by many of the traditional financial models.

Social implications

Assist in supporting insights to measure in errors and equations that result in inefficient resource allocation and beta discounting that supports the financial crisis created by assets subject to long-term decision needs (delta function).

Originality/value

The paper offers a combination and comparison of neoclassic asset pricing using a modified CAPM (two-pass) approach within the structural frame of Kahneman and Tversky’s (1979) prospect theory. This technique allows the consideration of the effects of present bias, beta-delta functions and the operation of the Allais Paradox in market states that are characterized by gains and losses and thus risk aversion and risk seeking behavior. This ability for differentiation allows for the development of endogenous time-preferences and hyperbolic discounting factors characteristic of commercial property investment.

Details

Journal of Property Investment & Finance, vol. 35 no. 3
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 1 April 2002

E.R. Laubscher

The underlying principle of the Capital Asset Pricing Model (CAPM) is that there is a linear relationship between systematic risk, as measured by beta, and expected share…

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Abstract

The underlying principle of the Capital Asset Pricing Model (CAPM) is that there is a linear relationship between systematic risk, as measured by beta, and expected share returns. The CAPM attempts to describe this relationship by using beta to explain the differences between the expected returns on various shares and share portfolios. The CAPM has been the subject of considerable theoretical investigation and empirical research. The aim of this article is to establish the current knowledge of the usefulness of the CAPM, i.e. whether it provides a reasonable description of reality and whether it is a useful tool for investment decision‐making. The main conclusion drawn from the study is that the CAPM is useful and that it does describe and explain the risk/return relationship. However, other risk factors (i.e. other than beta) may also be useful for explaining share returns. Investors should therefore be cautious when using the model to evaluate investment performance.

Details

Meditari Accountancy Research, vol. 10 no. 1
Type: Research Article
ISSN: 1022-2529

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Article
Publication date: 3 June 2019

Salman Ahmed Shaikh, Mohd Adib Ismail, Abdul Ghafar Ismail, Shahida Shahimi and Muhammad Hakimi Mohd. Shafiai

This paper aims to study the cross section of expected returns on Shari’ah-compliant stocks in Pakistan by using single- and multi-factor asset pricing models.

Abstract

Purpose

This paper aims to study the cross section of expected returns on Shari’ah-compliant stocks in Pakistan by using single- and multi-factor asset pricing models.

Design/methodology/approach

To estimate cross section of expected returns of Shari’ah-compliant stocks, the study uses capital asset pricing model (CAPM), Fama-French three-factor model and Fama-French five-factor model. Data for the period 2001-2015 on 217 companies are used. For the market portfolio, PSX-100 and Dow Jones Islamic Index for Pakistan are used.

Findings

The study could not find empirical support for CAPM using Lintner (1965), Black et al. (1972) and Fama and Macbeth (1973) approach. Nonetheless, the relation between beta and returns is positive in up-market and negative in down-market. The results of Fama-French three-factor and five-factor models suggest that size premium is positive and significant for explaining the cross section of stock returns of small size stocks, whereas value premium is positive and significant for explaining the cross section of returns of high value stocks.

Practical implications

The results suggest that fund managers can use Shari’ah-compliant stocks for portfolio diversification and for offering specialized investments given the positive market excess returns and the existence of size and value premium on Shari’ah-compliant stocks.

Originality/value

This is the first study on Fama-French (2015) five-factor model for Islamic capital markets in Pakistan.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 12 no. 2
Type: Research Article
ISSN: 1753-8394

Keywords

Article
Publication date: 15 July 2020

Hakan Aygoren and Emrah Balkan

The 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…

Abstract

Purpose

The 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/approach

The 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.

Findings

The 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/value

Unlike 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.

Details

Managerial Finance, vol. 46 no. 11
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 7 March 2008

Seoki Lee and Arun Upneja

The purpose of this paper is to compare traditional methods of estimating the cost‐of‐equity (capital asset pricing model and Fama and French three‐factor model) with a…

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Abstract

Purpose

The purpose of this paper is to compare traditional methods of estimating the cost‐of‐equity (capital asset pricing model and Fama and French three‐factor model) with a new approach, implied cost‐of‐equity method, to provide lodging analysts, investors, executives and researchers with a more reliable way to estimate cost‐of‐equity.

Design/methodology/approach

The study uses data from publicly traded lodging firms in the USA that provide all necessary financial data for cost‐of‐equity estimation. The data range from 1976 to 2005.

Findings

The study finds that the price‐to‐forward earnings (PFE), using the implied cost‐of‐equity (ICE), approach, estimates cost‐of‐equity of publicly‐traded lodging firms more reliably, compared with CAPM.

Practical implications

The study recommends that lodging industry analysts, investors, executives and researchers adopt the ICE approach, especially using the PFE model, to estimate cost‐of‐equity of publicly‐traded lodging firms.

Originality/value

The study attempts to provide a more reliable approach to estimate cost‐of‐equity for publicly‐traded lodging firms, specifically compared with the traditional approach, the CAPM.

Details

International Journal of Contemporary Hospitality Management, vol. 20 no. 2
Type: Research Article
ISSN: 0959-6119

Keywords

1 – 10 of over 1000