Liquidity adjusted capital asset pricing model in an emerging market: Liquidity risk in Borsa Istanbul

The article shows how the international capital asset pricing model (ICAPM) with Markov regime switching can model the asset returns in the emerging market of Mexico. For most assets, although significant, the international risk premium factor is not subject to regime switching, but the domestic factor is. The probabilities of regimes are correlated with the volatility of assets. A GARCH(1,1) Markov regime switching model offers better adjustment than a non-GARCH. JEL Classification: C58, F36, F65, G12, G15

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DOES CAPITAL ASSET PRICING MODEL APPLY IN A VARYING MARKET CONDITIONS?

American Journal of Finance ◽

10.47672/ajf.412 ◽

2019 ◽

Vol 4 (1) ◽

pp. 57

Author(s):

Michael Amoh Asiedu ◽

Richard Oduro ◽

Emmanuel Kojo Amoah

Keyword(s):

Asset Pricing ◽

Stock Exchange ◽

Emerging Market ◽

Capital Asset Pricing Model ◽

Capital Asset Pricing ◽

Pricing Model ◽

Capital Asset ◽

Market Conditions ◽

Asset Pricing Model ◽

Ghana Stock Exchange

Purpose: Capital asset pricing model (CAPM) has been one of the major asset pricing tools applied on the capital market to price listed securities. Several researchers have challenged the overall efficiency and validity of the model in terms of its ability to explain the behavior of the average returns on the basis of a single variable. The debate is now taking a new trend which aimed at assessing the robustness of the model in varying market conditions and this has been the main focus of the study; that is to determine whether or not CAPM applies to securities on Ghana Stock Exchange at different market conditions.Methodology: Data on monthly returns of 29 shares were selected from the Ghana Stock Exchange spanning from 2010 to 2018 and analyzed using regression analysis on the assumption of constant risk and varying risk situations.Findings: The study evidenced that the systematic risks differ between bulls, tranquil and bear periods. Market conditions therefore have impact on the CAPM model. CAPM is not robust with changes in market conditions after all especially in an emerging market such as the Ghana Stock Exchange.Contribution to theory, practice and policy: The result of this study implies that, the widely accepted CAPM for asset pricing model is not robust to changes in market conditions. It is therefore essential to predict future market conditions when formulating investment strategy as an investor. Again, investors should vary their risk premium depending on their expectation of the market conditions at the time of investment.

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The Capital Asset Pricing Model And Fama-French Three Factor Model In An Emerging Market Environment

International Business & Economics Research Journal (IBER) ◽

10.19030/iber.v16i4.10040 ◽

2017 ◽

Vol 16 (4) ◽

pp. 231-256 ◽

Cited By ~ 1

Author(s):

Adam Karp ◽

Gary Van Vuuren

Keyword(s):

Asset Pricing ◽

Factor Model ◽

Emerging Market ◽

Capital Asset Pricing Model ◽

Capital Asset Pricing ◽

Pricing Model ◽

Capital Asset ◽

Market Environment ◽

Asset Pricing Model ◽

Three Factor

This paper tests the validity and accuracy of the Capital Asset Pricing Model and the Fama-French Three-Factor Model, by predicting the variation in excess portfolio returns on the Johannesburg Stock Exchange. Portfolios of stocks were constructed based on an adapted Fama-French (1993) approach, using a annual sorting procedure, based on Size and Book-to-Market metrics respectively. The sample period spans six years, 2010 to 2015, and includes 46 companies listed on the JSE. The results indicate that both models perform relatively poorly because of inadequate market proxy measures, market liquidity restrictions, unpriced risk factors and volatility inherent in an emerging market environment. The Value Premium is found to explain a larger proportion of variation in excess returns than the Size Premium, and is more pronounced in portfolios with relatively higher book-to-market portfolios.

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