APPLICABILITY OF CAPM: EVIDENCE FROM PAKISTAN STOCK EXCHANGE (PSX)
Keywords:
Asset Pricing Theory, Capital Asset Pricing Model (CAPM), Pakistan Stock Exchange (PSX), Return on SecuritiesAbstract
The Capital Asset Pricing Model (CAPM) has been extensively used in the world of finance, for computing the expected return of securities. This study examines whether Capital Asset Pricing Model (CAPM) is a useful technique for evaluating the return on the securities of cement sector companies listed on Pakistan Stock Exchange (PSX). Further, this research also tests the applicability and validity of model on cement sector companies. The inferences taken from this study through data analysis, reveal a weak correlation of expected return and realized excess returns on securities; hence, CAPM is an empirically weak model to be used in the market for accurate forecasting of returns.
References
Basu, S. (1983). The relationship between earnings’ yield, market value and return
for NYSE common stocks. Journal of Financial Economics, 12(1), 129-
156. doi: http://dx.doi.org/10.1016/0304-405X(83)90031-4
Bhatti, U., & Hanif, M. (2010). The validity of Capital Assets Pricing
Model: Evidence from KSE-Pakistan. European Journal of
Economics, Finance and Administrative Sciences, 20.
Black, F. (1972). Capital Market Equilibrium with Restricted Borrowing.
The Journal of Business, 45(3), 444-455.
Black, F., Jensen, M. C., & Scholes, M. (1972). The Capital Asset Pricing
Model: Some Empirical Tests. In M. C. Jensen (Ed.), Studies in
the Theory of Capital Markets: Praeger Publishers Inc.
Breeden, D. T. (1979). An intertemporal asset pricing model with
stochastic consumption and investment opportunities. Journal of
Financial Economics, 7(3), 265-296.
Chan, A., & Chui, A. P. L. (1996). An Empirical Re-Examination of the
Cross-Section of Expected Returns: UK Evidence. Journal of
Business Finance & Accounting, 23(9-10), 1435-1452. doi:
10.1111/j.1468-5957.1996.tb01211.x
Chan, L. K. C., & Lakonishok, J. (1993). Institutional trades and intraday
stock price behavior. Journal of Financial Economics, 33(2),
173-199. doi: http://dx.doi.org/10.1016/0304-405X(93)90003-T
Choudhary, K., & Choudhary, S. (2010). Testing Capital Asset Pricing
Model: Empirical Evidences from Indian Equity Market.
Eurasian Journal of Business and Economics.
Diwani, M., & Asgharian, H. (2010). Testing the CAPM in the Indian
Market. Lund University, Sweden.
Fama, E. F., & French, K. R. (1992). The Cross-Section of Expected Stock
Returns. The Journal of Finance, 47(2), 427-465. doi: 10.1111/
j.1540-6261.1992.tb04398.x
Fama, E. F., & French, K. R. (2004). The Capital Asset Pricing Model: Theory
and Evidence. The Journal of Economic Perspectives, 18(3), 25-46.
Fama, E. F., & MacBeth, J. D. (1973). Risk, Return, and Equilibrium:
Empirical Tests. Journal of Political Economy, 81(3), 607-636. doi: doi:10.1086/260061
Fletcher, J. (1997). An examination of the cross-sectional relationship of beta
and return: UK evidence. Journal of Economics and Business, 49(3),
211-221. doi: http://dx.doi.org/10.1016/S0148-6195(97)00006-4
Fraser, P., Hamelink*, F., Hoesli, M., & Macgregor, B. (2004). Timevarying
betas and the cross-sectional return–risk relation:
evidence from the UK. The European Journal of Finance, 10(4),
255-276. doi: 10.1080/13518470110053407
Iqbal, J., & Brooks, R. (2007). A Test of CAPM on the Karachi Stock
Exchange International Journal of Business, 12(4), 429-444.
Javid, A. Y., & Ahmed, E. (2008). The Conditional Capital Asset Pricing
Model: Evidence from Karachi Stock Exchange(No. 2008: 48).
Pakistan Institute of Development Economics.
Jagannathan, R. & Wang, Z. (1993). The CAPM is alive and well (Vol.
165). Research Department Staff Report (165): Federal Reserve Bank of Minneapolis.
Jegadeesh, N., & Titman, S. (1993). Returns to Buying Winners and Selling
Losers: Implications for Stock Market Efficiency. The Journal of
Finance, 48(1), 65-91. doi: 10.1111/j.1540-6261.1993.tb04702.x
Lakonishok, J., & Shapiro, A. C. (1986). Systematic risk, total risk, and size as
determinants of stock market returns. Journal of Banking & Finance,
10(1), 115-132. doi: http://dx.doi.org/10.1016/0378-4266(86)90023-3
Lau, S. C., Quay, S. R., & Ramsey, C. M. (1974). The Tokyo Stock
Exchange and the capital asset pricing model. The journal of finance, 29(2), 507-514.
Lintner, J. (1965). The Valuation of Risk Assets and the Selection of Risky
Investments in Stock Portfolios and Capital Budgets. The Review
of Economics and Statistics, 47(1), 13-37. doi: 10.2307/1924119
Markowitz, H. (1952). PORTFOLIO SELECTION*. The Journal of
Finance, 7(1), 77-91. doi: 10.1111/j.1540-6261.1952.tb01525.x Michailidis, G., Tsopoglou, S., & Papanastasiou, D. (2006). Testing The
Capital Asset Pricing Model (CAPM): The Case of The Emerging
Greek Securities Market. International Research Journal of
Finance and Economics, 4(1), 78-82.
Morelli, D. (2003). Capital asset pricing model on UK securities using
ARCH. Applied Financial Economics, 13(3), 211-223. doi:
10.1080/09603100110115174
Raza, S. A., Jawaid, S. T., Arif, I., & Qazi, F. (2011). Validity of capital
asset pricing model in Pakistan: Evidence from Karachi Stock
Exchange. African Journal of Business Management, 5(32),
12598-12605. doi: 10.5897/AJBM11.2105
Ritter, J. R., & Chopra, N. (1989). Portfolio Rebalancing and the Turn-ofthe-
Year Effect. The Journal of Finance, 44(1), 149-166. doi:
10.1111/j.1540-6261.1989.tb02409.x
Roll, R. (1983). On computing mean returns and the small firm premium.
Journal of Financial Economics, 12(3), 371-386. doi:
http://dx.doi.org/10.1016/0304-405X(83)90055-7
Sharifzadeh, M. (2010). An Empirical and Theoretical Analysis of Capital
Asset Pricing Model. Boca Raton, USA: Universal-Publishers.
Sharpe, W. F. (1964). Capital Asset Prices: A Theory of Market
Equilibrium under Conditions of Risk. The Journal of Finance,
19(3), 425-442. doi: 10.1111/j.1540-6261.1964.tb02865.x
Sharpe, W. F., & Guy, M. C. (1972). Risk-Return Classes of New York
Stock Exchange Common Stocks, 1931-1967. Financial Analysts Journal, 28(2), 46-81.
Strong, N., & Xu, X. G. (1997). Explaining the Cross-Section of UK
Expected Stock Returns. The British Accounting Review, 29(1),
1-23. doi: http://dx.doi.org/10.1006/bare.1996.0030
Yang, X., Xu, D., & Hellström, J. (2006). Testing the CAPM Model- A
study of the Chinese Stock Market. (Master Thesis Master
Thesis), UMEA University, Sweden.
for NYSE common stocks. Journal of Financial Economics, 12(1), 129-
156. doi: http://dx.doi.org/10.1016/0304-405X(83)90031-4
Bhatti, U., & Hanif, M. (2010). The validity of Capital Assets Pricing
Model: Evidence from KSE-Pakistan. European Journal of
Economics, Finance and Administrative Sciences, 20.
Black, F. (1972). Capital Market Equilibrium with Restricted Borrowing.
The Journal of Business, 45(3), 444-455.
Black, F., Jensen, M. C., & Scholes, M. (1972). The Capital Asset Pricing
Model: Some Empirical Tests. In M. C. Jensen (Ed.), Studies in
the Theory of Capital Markets: Praeger Publishers Inc.
Breeden, D. T. (1979). An intertemporal asset pricing model with
stochastic consumption and investment opportunities. Journal of
Financial Economics, 7(3), 265-296.
Chan, A., & Chui, A. P. L. (1996). An Empirical Re-Examination of the
Cross-Section of Expected Returns: UK Evidence. Journal of
Business Finance & Accounting, 23(9-10), 1435-1452. doi:
10.1111/j.1468-5957.1996.tb01211.x
Chan, L. K. C., & Lakonishok, J. (1993). Institutional trades and intraday
stock price behavior. Journal of Financial Economics, 33(2),
173-199. doi: http://dx.doi.org/10.1016/0304-405X(93)90003-T
Choudhary, K., & Choudhary, S. (2010). Testing Capital Asset Pricing
Model: Empirical Evidences from Indian Equity Market.
Eurasian Journal of Business and Economics.
Diwani, M., & Asgharian, H. (2010). Testing the CAPM in the Indian
Market. Lund University, Sweden.
Fama, E. F., & French, K. R. (1992). The Cross-Section of Expected Stock
Returns. The Journal of Finance, 47(2), 427-465. doi: 10.1111/
j.1540-6261.1992.tb04398.x
Fama, E. F., & French, K. R. (2004). The Capital Asset Pricing Model: Theory
and Evidence. The Journal of Economic Perspectives, 18(3), 25-46.
Fama, E. F., & MacBeth, J. D. (1973). Risk, Return, and Equilibrium:
Empirical Tests. Journal of Political Economy, 81(3), 607-636. doi: doi:10.1086/260061
Fletcher, J. (1997). An examination of the cross-sectional relationship of beta
and return: UK evidence. Journal of Economics and Business, 49(3),
211-221. doi: http://dx.doi.org/10.1016/S0148-6195(97)00006-4
Fraser, P., Hamelink*, F., Hoesli, M., & Macgregor, B. (2004). Timevarying
betas and the cross-sectional return–risk relation:
evidence from the UK. The European Journal of Finance, 10(4),
255-276. doi: 10.1080/13518470110053407
Iqbal, J., & Brooks, R. (2007). A Test of CAPM on the Karachi Stock
Exchange International Journal of Business, 12(4), 429-444.
Javid, A. Y., & Ahmed, E. (2008). The Conditional Capital Asset Pricing
Model: Evidence from Karachi Stock Exchange(No. 2008: 48).
Pakistan Institute of Development Economics.
Jagannathan, R. & Wang, Z. (1993). The CAPM is alive and well (Vol.
165). Research Department Staff Report (165): Federal Reserve Bank of Minneapolis.
Jegadeesh, N., & Titman, S. (1993). Returns to Buying Winners and Selling
Losers: Implications for Stock Market Efficiency. The Journal of
Finance, 48(1), 65-91. doi: 10.1111/j.1540-6261.1993.tb04702.x
Lakonishok, J., & Shapiro, A. C. (1986). Systematic risk, total risk, and size as
determinants of stock market returns. Journal of Banking & Finance,
10(1), 115-132. doi: http://dx.doi.org/10.1016/0378-4266(86)90023-3
Lau, S. C., Quay, S. R., & Ramsey, C. M. (1974). The Tokyo Stock
Exchange and the capital asset pricing model. The journal of finance, 29(2), 507-514.
Lintner, J. (1965). The Valuation of Risk Assets and the Selection of Risky
Investments in Stock Portfolios and Capital Budgets. The Review
of Economics and Statistics, 47(1), 13-37. doi: 10.2307/1924119
Markowitz, H. (1952). PORTFOLIO SELECTION*. The Journal of
Finance, 7(1), 77-91. doi: 10.1111/j.1540-6261.1952.tb01525.x Michailidis, G., Tsopoglou, S., & Papanastasiou, D. (2006). Testing The
Capital Asset Pricing Model (CAPM): The Case of The Emerging
Greek Securities Market. International Research Journal of
Finance and Economics, 4(1), 78-82.
Morelli, D. (2003). Capital asset pricing model on UK securities using
ARCH. Applied Financial Economics, 13(3), 211-223. doi:
10.1080/09603100110115174
Raza, S. A., Jawaid, S. T., Arif, I., & Qazi, F. (2011). Validity of capital
asset pricing model in Pakistan: Evidence from Karachi Stock
Exchange. African Journal of Business Management, 5(32),
12598-12605. doi: 10.5897/AJBM11.2105
Ritter, J. R., & Chopra, N. (1989). Portfolio Rebalancing and the Turn-ofthe-
Year Effect. The Journal of Finance, 44(1), 149-166. doi:
10.1111/j.1540-6261.1989.tb02409.x
Roll, R. (1983). On computing mean returns and the small firm premium.
Journal of Financial Economics, 12(3), 371-386. doi:
http://dx.doi.org/10.1016/0304-405X(83)90055-7
Sharifzadeh, M. (2010). An Empirical and Theoretical Analysis of Capital
Asset Pricing Model. Boca Raton, USA: Universal-Publishers.
Sharpe, W. F. (1964). Capital Asset Prices: A Theory of Market
Equilibrium under Conditions of Risk. The Journal of Finance,
19(3), 425-442. doi: 10.1111/j.1540-6261.1964.tb02865.x
Sharpe, W. F., & Guy, M. C. (1972). Risk-Return Classes of New York
Stock Exchange Common Stocks, 1931-1967. Financial Analysts Journal, 28(2), 46-81.
Strong, N., & Xu, X. G. (1997). Explaining the Cross-Section of UK
Expected Stock Returns. The British Accounting Review, 29(1),
1-23. doi: http://dx.doi.org/10.1006/bare.1996.0030
Yang, X., Xu, D., & Hellström, J. (2006). Testing the CAPM Model- A
study of the Chinese Stock Market. (Master Thesis Master
Thesis), UMEA University, Sweden.
Downloads
Published
2017-12-15
How to Cite
Shaikh, D. S. A., Shaikh, R., & Shaique, M. (2017). APPLICABILITY OF CAPM: EVIDENCE FROM PAKISTAN STOCK EXCHANGE (PSX). Journal of Business Strategies, 11(2), 21–40. Retrieved from http://www.greenwichjournals.com/index.php/businessstudies/article/view/374
Issue
Section
Articles
