Capital market of Bulgaria: testing different CAPM corrections

The present study makes comparison in the usage and the level of accuracy of different methods for calculation of the expected return. The presented methods are based on CAPM, but with different corrections. We are going to test the traditional CAPM of Sharpe (1963) and Lintner (1964), the downside D-CAPM proposed by Estrada (2002), and three methods presented by the authors of this study. The first method uses combination of downside and upside beta to compute the risk in CAPM; the second uses the absolute deviation as a measure of risk; the third method integrates skewness in CAPM, but makes it by using different approach than familiar downside methods. The skewness is added as additional multiplier in the CAPM

Project valuation and investment decisions: CAPM versus arbitrage

This paper shows that (i) project valuation via disequilibrium NPV+CAPM contradicts valuation via arbitrage pricing, (ii) standard CAPM-minded decision makers may fail to profit from arbitrage opportunities, (iii) standard CAPM-based valuation violates value additivity. As a consequence, the standard use of CAPM for project valuation and decision making should be reconsidered.Investment, valuation, CAPM, arbitrage, disequilibrium NPV

Risk and return nexus in Malaysian stock market: Empirical evidence from CAPM

This paper examines the applicability of CAPM in explaining the risk-return relation in the Malaysian stock market for the period of January 1995 to December 2006. The test, using linear regression method, was carried out on four models: the standard CAPM model with constant beta (Model I), the standard CAPM model with time-varying beta (Model II), the CAPM model conditional on segregating positive and negative market risk premiums with constant beta (Model III), as well as the CAPM model conditional on segregating positive and negative market risk premiums with time varying beta (Model IV). Empirical results indicate that both the standard CAPM models (Model I and Model II) are statistically insignificant. However, the CAPM models conditional on segregating positive and negative market risk premiums (Model III and Model IV) are statistically significant. In addition, this study also discovers that time varying beta provides better explanatory power.Stock market; CAPM; time-varying beta

The Conditional CAPM does not Explain Asset-Pricing Anamolies

Recent studies suggest that the conditional CAPM might hold, period-by-period, and that time-varying betas can explain the failures of the simple, unconditional CAPM. We argue, however, that significant departures from the unconditional CAPM would require implausibly large time-variation in betas and expected returns. Thus, the conditional CAPM is unlikely to explain asset-pricing anomalies like book-to-market and momentum. We test this conjecture empirically by directly estimating conditional alphas and betas from short-window regressions (avoiding the need to specify conditioning information). The tests show, consistent with our analytical results, that the conditional CAPM performs nearly as poorly as the unconditional CAPM.

The development of a methodology for the evaluation of installed CAPM system’s effectiveness and efficiency

The objective of this work was to design, develop and evaluate an audit for a Computer Aided Production Management (CAPM) system. Such systems, despite their costs of purchase and implementation, find wide application in industry but there is still considerable debate as to their contribution to the overall performance of a company. A variety of possible methodologies were explored. However, it was found that most of the existing analytical techniques tended to focus on a comparison of systems with respect to best practice or to require data that a company was unlikely to have. Best practice is not an absolute measure, nor does it take account of different company types and their individual requirements. A flexible methodology, 'the CAPM Audit', designed to establish the effectiveness and efficiency of any installed CAPM system, has been developed. The audit is a development of the Delphi approach and is designed to establish the contribution of the CAPM system to the company's overall competitive position. In its development, a generic model for any CAPM system was devised to facilitate analysis without reference to any particular technology, management mode, or manufacturing control system. The audit developed (in the form of a workbook) consists of four stages: stage one establishes the context; stage two determines the underlying architecture of the system; stage three quantifies the contribution to the company's competitive position; and stage four identifies the causes of any failure of the CAPM system. The design of the audit is such that: it enables a systematic investigation of the effectiveness and efficiency of an installed CAPM system to be completed; it enables the CAPM system's contribution to the company to be identified; and it also enables any inadequacies to be determined

THEORETICAL FLAWS IN THE USE OF THE CAPM FOR INVESTMENT DECISIONS

This paper uses counterexamples and simple formalization to show that the standard CAPM-based Net Present Value may not be used for investment valuations. The reason is that the standard CAPM-based capital budgeting criterion implies a notion of value which does not comply with the principle of additivity. Framing effects arise in decisions so that different descriptions of the same problem lead to different choices. As a result, the CAPM-based NPV as a tool for valuing projects and making investment decisions is theoretically unsound, even if the CAPM assumptions are met.Capital budgeting, CAPM, investment decisions, nonadditivity, framing effects

Portfolio Selection with Monotone Mean-Variance Preferences

We propose a portfolio selection model based on a class of monotone preferences that coincide with mean-variance preferences on their domain of monotonicity, but differ where mean-variance preferences fail to be monotone and are therefore not economically meaningful. The functional associated to this new class of preferences is the best approximation of the mean-variance functional among those which are monotonic. We solve the portfolio selection problem and we derive a monotone version of the CAPM, which has two main features: (i) it is, unlike the standard CAPM model, arbitrage free, (ii) it has empirically testable CAPM-like relations. The monotone CAPM has thus a sounder theoretical foundation than the standard CAPM and a comparable empirical tractability.Mean-Variance Preferences, Optimal Portfolios

Portfolio Selection with Monotone Mean-Variance Preferences

We propose a portfolio selection model based on a class of monotone preferences that coincide with mean-variance preferences on their domain of monotonicity, but differ where mean-variance preferences fail to be monotone and are therefore not economically meaningful. The functional associated to this new class of preferences is the best approximation of the mean-variance functional among those which are monotonic. We solve the portfolio selection problem and we derive a monotone version of the CAPM, which has two main features: (i) it is, unlike the standard CAPM model, arbitrage free, (ii) it has empirically testable CAPM-like relations. The monotone CAPM has thus a sounder theoretical foundation than the standard CAPM and a comparable empirical tractability.Portfolio Selection, Decision Theory, Mean-Variance

The stable long-run CAPM and the cross-section of expected returns

The capital-asset-pricing model (CAPM) is one of the most popular methods of financial market analysis. But, evidence of the poor empirical performance of the CAPM has accumulated in the literature. For example, based on their empirical results regarding the relation between market Beta and average return, Fama and French (1996) conclude that the CAPM is no longer a useful tool for empirical financial market analysis. Most empirical studies of the conventional CAPM take, however, neither the fat-tails of return data nor the price relationship between an asset of interest and the bench market portfolio into account. In the framework of a univariate Beta-model we consider a stable long-run CAPM taking account of the fat-tails of stock returns and the common stochastic trends between stock prices. Using the same data used by Fama and French (1996), the stable long-run CAPM demonstrates that Markowitz rule of the expected returns and variance of returns can (still) -without any use of firm specific variables- explain the variation of the cross-sectional average returns. -- Das Capital-Asset-Pricing-Modell (CAPM) ist einer der populärsten empirischen Ansätze zur Analyse der Finanzmarktdaten. In der Literatur jedoch sind eher Gegenbeweise über seine empirische Tauglichkeit akkumuliert. Fama und French (1996) haben beispielsweise aufgrund ihrer empirischen Untersuchungsergebnisse über die Beziehung zwischen dem Markt-Beta und der Durchschnittsrendite schlussgefolgert, daß das CAPM keine nützliche Methode für empirische Finanzmarktanalyse mehr sein kann. Die meisten Arbeiten aber, die sich mit dem CAPM beschäftigen, berücksichtigen weder die ausreißerreiche empirische Renditenverteilung noch die Preisbeziehung zwischen dem einzelnen Kurs und dem Benchmark. In der vorliegenden Arbeit wird im Rahmen univariater Beta-Modelle ein Versuch zur Spezifikation eines stabilen langfristigen CAPM gemacht, das sowohl die ausreißerreiche empirische Renditenverteilung als auch die Preisbeziehung zwischen dem einzelnen Kurs und dem Benchmark berücksichtigt. Mit dem Datensatz von Fama und French (1996) wird gezeigt, daß das stabile langfristige CAPM in der Lage ist, anhand der Markowitz?schen Mittelwert-Varianz-Regel ?ohne Hinzufügen firmspezifischer Variablen? die Variabilität durchschnittlicher Rendite in Querschnittsdaten zu erklären.CAPM,Stable Paretian distribution,Sto chastic common trend