Non-standardized form of CAPM and stock returns

Muhammad, Irfan (2012): Non-standardized form of CAPM and stock returns. Published in: International Journal of Business and Social Science , Vol. 3, No. 2 (January 2012): pp. 193-201.

Abstract

Emerging markets like Pakistan confront with the problem to validate the CAPM in its original form. Since standard form of this model has unrealistic assumptions, different non-standardized forms have been introduced by different researchers. This paper also introduces a non-standardized form of CAPM to validate whether it is applicable in Pakistan. The data of 20 companies of different sectors, covering the period of 2007 to 2008 were collected. One year KIBOR is taken in replacement of T-bill rates. Beta 3 is calculated using an equation to show the negative relationship between interest rate and market returns. The results of regression analysis reveal mixed results. For instance, mean return of companies in cement and chemical sector is linearly related to its beta risk while other sectors have volatile results.

• Item Type: MPRA Paper
• Language: English
• Keywords: CAPM, Corporate Finance, Market Return
• Subjects: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; P - Economic Systems > P3 - Socialist Institutions and Their Transitions > P34 - Financial Economics

References

Bent, Holmstrom and Jean Tirole (2001). LAPM: A Liquidity-Based Asset Pricing Model. TheJouranal of Finance, Vol. 56, No. 5, pp. 1837-1867.

Christopher G. and William D (1990). Heteroskedasticity in Stock Return Data: Volume versus GARCH Effects. The Journal of Finance, Vol. 45, No.1, pp. 221-229.

Huang (2000). Tests of regimes-switching CAPM. The Journal of Finance, Vol. 10, pp 573-578

Javid and Eatzaz (2008). Test of Multi-moment Capital Asset Pricing Model: Evidence from Karachi Stock Exchange. Pakistan Institute of Development Economics Islamabad, working paper

Johansson Andrew (2005). Pricing Skewness and Kurtosis Risk on the Swedish Stock Market. Master Thesis. School of Economics and Management

Kraus, A and R. Litzenberger (1976). Skewness Preference and the Valuation of Risky Assets. Journal of Finance, pp. 1085-1094

Lau & Quay (1974). The Tokyo stock exchange and the capital asset pricing model. The Journal of Finance, Vol.29, No.2, pp 507-514

Markowitz Harry (1959). Portfolio selection: Efficient diversification of investments, New York, John Wiley.

Zhou & Guofu (1993). Asset-Pricing Tests Under Alternative Distributions. The Journal of Finance; Vol. 48, No.5