1998 Words8 Pages

Testing the Capital Asset Pricing Model
And the Fama-French Three-Factor Model
By Jiaxin Ling (Cindy) March 19, 2013
Key words: Asset Pricing, Statistical Methods, CAPM, Fama-French Three-Factor Model
Abstract:
This paper examines the Capital Asset Pricing Model(CAPM) and the Fama-French three-factor model(FF) and the Fama-MacBeth model(FM) for the 201211 CRSP database using monthly returns from 25 portfolios for 2 periods ---July 1931 to June 2012 and July 1631 to June 2012. The theory’s prediction is that the intercept should equal to zero the slope should be the excess return on the market portfolio. The findings of this study are not substantiating the theory’s claim for the fact that in some portfolios the alpha is*…show more content…*

3) One may observe that the data in period two is a sub period of period one and the beta is not stable over time for more portfolios have less than unit value beta in period two and some portfolios tend to be more volatile in the whole period (July 1931 to June 2012) but in sub period (July 1963 to June 2012) is less volatile than market level, take portfolio 24 as an example: its beta is 1.14 in period one and in period two its beta is 0.83. 2. The OLS cross-sectional test of the CAPM The CAPM states that the securities plot on the Security Market Line (SML) in equilibrium. We do cross-sectional test is to identify whether the above statement is true with our two data set and whether or not it rejects the hypothesis that the slope is zero. In the equation 3, the gamma 0 is the excess return on a zero beta portfolio and gamma 1 (the slope of the regression) is the market portfolio's average risk premium. [pic] (3) We perform the OLS cross-sectional test of equation (3) for both two periods. The results have shown in Table 3that gamma1 in time period 1 is positive (0.55) and it is statistically significant for its p value is 0.05, which implies that it rejects the null hypothesis of zero slope of the model. The gamma0 is also positive (0.26) which suggests that the cross-sectional return of 25 sample portfolios during July 1931

3) One may observe that the data in period two is a sub period of period one and the beta is not stable over time for more portfolios have less than unit value beta in period two and some portfolios tend to be more volatile in the whole period (July 1931 to June 2012) but in sub period (July 1963 to June 2012) is less volatile than market level, take portfolio 24 as an example: its beta is 1.14 in period one and in period two its beta is 0.83. 2. The OLS cross-sectional test of the CAPM The CAPM states that the securities plot on the Security Market Line (SML) in equilibrium. We do cross-sectional test is to identify whether the above statement is true with our two data set and whether or not it rejects the hypothesis that the slope is zero. In the equation 3, the gamma 0 is the excess return on a zero beta portfolio and gamma 1 (the slope of the regression) is the market portfolio's average risk premium. [pic] (3) We perform the OLS cross-sectional test of equation (3) for both two periods. The results have shown in Table 3that gamma1 in time period 1 is positive (0.55) and it is statistically significant for its p value is 0.05, which implies that it rejects the null hypothesis of zero slope of the model. The gamma0 is also positive (0.26) which suggests that the cross-sectional return of 25 sample portfolios during July 1931

Related

## The Capital Asset Pricing Model

1472 Words | 6 Pagescomparing and contrasting the effectives of the capital asset pricing model (CAPM), Arbitrage Pricing Theory, and the Fama-French three factor model when estimating the cost of capital and explaining performance of investment portfolios. The CAPM model was developed by Sharpe (1964) to explain how capital markets set share prices. (Pike and Neale) In result of research by Sharpe (1964), Litner (1965) and Black (1972) the Capital Asset Pricing Model (CAPM) states “the relationship between beta (measure

## The Cost Of Equity And Capital Asset Pricing Model

851 Words | 4 Pagesto calculate the cost of equity which are Dividend Growth Model and Capital Asset Pricing Model (CAPM). Dividend Growth Model is a valuation method which takes into consideration dividend per share and its expected growth. This model assumes that dividends will be constant or growing at a fixed rate in perpetuity. On the other hand, Capital Asset Pricing Model explains how individual securities are valued, or priced, in efficient capital markets (Pike et al., 2012). This involves discounting the

## Capital Asset Pricing Model and Arbitrage Pricing Theory Essay examples

1240 Words | 5 PagesJeffrey Bruner, uses the Capital Asset Pricing Model (CAPM) to help identify mispriced securities. However, a consultant suggests Bruner to use Arbitrage Pricing Theory (APT) instead. As the following, it will mention the role of CAPM in the modern portfolio management; to clarify the APT faction and explain the reasons why should Bruner use APT to help identify mispriced securities. In modern portfolio management, the role of Capital Asset Pricing Model (CAPM) is a model that attempts to describe

## Capital Budgeting II And Efficient Markets

1418 Words | 6 PagesCapital Budgeting II & Efficient Markets I The theory of market efficiency states that no arbitrage exists, prices fully reflect all available information, prices follow random walks and that active management does not add any value to a portfolio. The theories of risk adjustment, cost of capital and the capital asset pricing model rely on people being rational. Unless we have rational behavior, the assumptions of the EMH are not sustainable. While the wisdom and behavior of the market crowds seem

## Capital Asset Pricing And Investor Behavior

1292 Words | 6 PagesIntroduction Graham and Harvey (2001) surveyed the CFOs of 392 U.S. firms and found that when estimating the capital of assets,73.5% of respondents use CAPM. It is a model which use simple formula to evaluate asset pricing and investor behavior. This model is absolutely the method with most investors used but many financial experts raise an objection to the veracity of this method in the recent years. Later in the main body of essay will discuss these question; In the first part of the essay will

## Capm Is Capital Asset Pricing Model

1407 Words | 6 PagesIn capital market, people are always seeking for the best investment project. They want to use the least cost to earn the most money. In another way, people always try to find the connection between the risk of an investment and its expected return. Nowadays, the most widely used model is CAPM. CAPM is Capital Asset Pricing Model. CAPM was funded by Jack Treynor (1962), William Sharpe (1964), John Lintner (1965a, b) and Jan Mossin (1966) (Dempsey, 2013). And it is the birth of asset pricing theory

## Validity Of The Fama French Three Factor Model

2972 Words | 12 PagesValidity of the Fama French Three-Factor Model in China during 2011-2015 Validity of the Fama French Three-Factor Model in China during 2011-2015 Chao Xiong Ohio University Abstract This paper mainly explores the validity of the Fama-French Three Factors model during 2011-2015 by using 30 stocks which is from A-share stock market in China, in contrast to the results of Fama and French (1993) in U.S, there are some differences. Market risk premium has a significant in Chinese

## The Valuation Of Mutual Fund

1461 Words | 6 Pagesfinancial practitioners and academics. Financial models have been established and developed in the financial market and these models have the purpose of assessing the expected returns of stocks and evaluating their performance related to the exposure to the market. The exploration for the risk-related asset pricing model that clarifies variations in stock returns is one of the most important issues in finance. Apparently, the capital asset pricing model (CAPM), which is proposed by Sharpe (1964) and

## The Capital Asset Pricing Model

1717 Words | 7 PagesFrom the very time of its development, there have been many attempts to prove the validity of the Capital Asset Pricing Model. For instance, Black, Jensen and Scholes (1972) performed a test to check if securities are priced accordingly to their systematic risk. In order to test the theory that there was a positive linear relation between the expected return and beta, instead of the individual stock, they used monthly return data and portfolios. They obtained ten portfolios of monthly returns for

## The Financial Momentum Effect On Bist30 Index Stocks

2118 Words | 9 PagesABSTRACT TESTING THE FINANCIAL MOMENTUM EFFECT ON BORSA ISTANBUL 30 INDEX Burcu Gürel Faculty of Engineering Department of Industrial Engineering Advisor: Yaman Ömer Erzurumlu, Adnan Çorum APRIL, 2016 15 The aim of this study is to investigate the financial momentum effect on pricing of stocks in Borsa Istanbul 30 index(BIST30). The sample for this study is monthly data from April 2013 to March 2016. Momentum effect is tested by using Fama-French Three Factor Model. The data is

### The Capital Asset Pricing Model

1472 Words | 6 Pages### The Cost Of Equity And Capital Asset Pricing Model

851 Words | 4 Pages### Capital Asset Pricing Model and Arbitrage Pricing Theory Essay examples

1240 Words | 5 Pages### Capital Budgeting II And Efficient Markets

1418 Words | 6 Pages### Capital Asset Pricing And Investor Behavior

1292 Words | 6 Pages### Capm Is Capital Asset Pricing Model

1407 Words | 6 Pages### Validity Of The Fama French Three Factor Model

2972 Words | 12 Pages### The Valuation Of Mutual Fund

1461 Words | 6 Pages### The Capital Asset Pricing Model

1717 Words | 7 Pages### The Financial Momentum Effect On Bist30 Index Stocks

2118 Words | 9 Pages

- “the Differences Between Art and Design Lie Not so Much in How They Look as in What They Do” Michael Brady
- Under What Conditions (If Ever) Should States Become Involved in Domestic Political Situations of Other Countries
- How to Install Windows 7 Essay examples
- Honda Element Essay
- Whole Foods Market: Will There Be Enough Organic Food to Satisfy the Growing Demand?
- Ford and Toyota Case Study Essay

- An Introduction to Physical Science
- BIOLOGY:CONCEPTS+APPL.(LOOSELEAF)
- Chemistry In Focus
- Chemistry
- Calculus (MindTap Course List)
- Probability and Statistics for Engineering and the Sciences
- Single Variable Calculus: Early Transcendentals, Volume I
- Elementary Geometry For College Students, 7e
- Calculus (MindTap Course List)
- Calculus: An Applied Approach (MindTap Course List)
- Statistics for Business & Economics, Revised (MindTap Course List)
- Introductory Chemistry: A Foundation
- Calculus: An Applied Approach (MindTap Course List)
- Probability and Statistics for Engineering and the Sciences
- Chemistry: An Atoms First Approach