scholarly journals Downside Risk-Based Six-Factor Capital Asset Pricing Model (CAPM): A New Paradigm in Asset Pricing

2020 ◽  
Vol 12 (17) ◽  
pp. 6756
Author(s):  
Usman Ayub ◽  
Samaila Kausar ◽  
Umara Noreen ◽  
Muhammad Zakaria ◽  
Imran Abbas Jadoon
Keyword(s):  
Asset Pricing ◽  
Factor Model ◽  
Five Factor Model ◽  
Downside Risk ◽  
Capital Asset Pricing Model ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Capital Asset ◽  
Asset Pricing Model ◽  
Effective Manner

The importance of downside risk cannot be denied. In this study, we have replaced beta in the five-factor model of using downside beta and have added a momentum factor to suggest a new six-factor downside beta capital asset pricing model (CAPM). Two models are tested—a beta- and momentum-based six-factor model and a downside-beta- (proxy of downside risk) and momentum-based six-factor model. Beta and downside beta are highly correlated; therefore, portfolios are double-sorted to disentangle the correlation. Factor loadings, i.e., size, value, momentum, profitability, and investment, are constructed. The standard methodologies are applied. Data for sample stocks from different non-financial sectors listed in the Pakistan Stock Exchange (PSX) are taken from January 2000 to December 2018. The PSX-100 index and three-month T-bills are taken as proxies for market and risk-free returns. The study uses three subsamples for robustness—period of very high volatility, period of stability, and period of stability and growth with volatility. The results show that the value factor is redundant in both models. The momentum factor is rejected in the beta-based six-factor model only. The beta-based six-factor model shows very low R2 in periods of highly volatility. The R2 is high for the other periods. In contrast, the downside beta six-factor model captures the downside trend of the market in an effective manner with a relatively high R2. The risk–return relationship is stronger for the downside beta model. These reasons lead us to believe that, overall, the downside beta six-factor model is a better option for investors as compared to the beta-based six-factor model in the area of asset pricing models.

scholarly journals A TEST OF THE FAMA-FRENCH FIVE FACTOR MODEL IN COMPARISON TO THE CAPITAL ASSET PRICING MODEL AT THE LUSAKA SECURITIES EXCHANGE

2018 ◽  
Vol 3 (1) ◽  
pp. 35
Author(s):  
Nsama Musawa ◽  
Prof. Sumbye Kapena ◽  
Dr . Chanda Shikaputo
Keyword(s):  
Asset Pricing ◽  
Stock Returns ◽  
Factor Model ◽  
Five Factor Model ◽  
Capital Asset Pricing Model ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Capital Asset ◽  
Asset Pricing Model ◽  
Fama And French

Purpose: The capital asset pricing model (CAPM)  is one of  the basic models in the security price analysis.Many asset pricing models have been developed to improve the CAPM.Among such models is the latest  Fama and French five factor model which is being  empirically tested in various stock markets. This study tested the five factor model in comparison to the capital asset pricing model. Testing the Fama and French Five factor model in comparison to the CAPM was important because the CAPM is widely taken to be the basic model in the security price analysis. Methodology: The Fama and French methodology was used to test  the data from an emerging market, the Lusaka Securities Exchange. A deductive, quantitative research design and secondary data from the Lusaka Securities Exchange was used. Data was analyzed using multiple regression. Results: The results indicate that the Five Factor model is better than the CAPM in capturing variation in the stock returns. The Adjusted R-squared for the five factor model from all individual portfolio sorting was 0.9, while that for the CAPM was 0.13 Unique contribution to theory, practice and policy: This study has contributed to theory in that it has added a voice to the ongoing debt on the suitability of  the new Fama and French Five Factor model which is at the cutting hedge in finance theory.Further the study is from developing capital market. Keywords:, CAPM, Stock returns, Fama and French five factor model

An Empirical Test of Capital Asset-pricing Model and Three-factor Model of Fama in Indian Stock Exchange

2018 ◽  
Vol 43 (4) ◽  
pp. 294-307
Author(s):  
Nenavath Sreenu
Keyword(s):  
Asset Pricing ◽  
Factor Model ◽  
Stock Exchange ◽  
Capital Asset Pricing Model ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Capital Asset ◽  
Expected Return ◽  
Asset Pricing Model ◽  
Three Factor

This article aims to test the capital asset-pricing model (CAPM) and three-factor model of Fama in Indian Stock Exchange, and it has focused on the recent growth of capital markets in India and the need of practitioners in these markets to determine a stable price for securities, and achieving expected returns has brought into consideration the theories predicting price securities Among different models the CAPM of Sharp. The study uses a sample of daily data and annual average for 54 companies listed on the National Stock Exchange, during the period from 2010 to 2016. The research article’s intention is to find whether the relationship between expected return and risk is linear, if beta is a complete measure of the risk and if a higher risk is compensated by a higher expected return. The results confirm that the intercept is statistically insignificant, upholding theory, for both individual assets and portfolios. The tests do not essentially provide validation against CAPM and Fama; however, other simulations can be built, more close to reality, by improving the model and offering an alternative which also takes into account the specific conditions of the Indian capital market and the global financial crisis consequences.

scholarly journals Analisis Komparasi Capital Asset Pricing Model dan Fama-French Three Factor Model untuk Penentuan Investasi Pada Saham Indeks IDX30 (Periode 2016 – 2018)

2020 ◽  
Vol 2 (2) ◽  
pp. 1
Author(s):  
Nadyah Brhigitta Dwiyuningsih Dotulong ◽  
Lanto Miriatin Amali ◽  
Selvi Selvi
Keyword(s):  
Asset Pricing ◽  
Annual Report ◽  
Factor Model ◽  
Capital Asset Pricing Model ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Capital Asset ◽  
Asset Pricing Model ◽  
Three Factor

Penelitian ini bertujuan untuk mengetahui Metode Capital Asset Pricing Model dan Fama-French Three Factor Model untuk penentuan investasi pada saham Indeks IDX30 periode 2016 – 2018 serta untuk membandingkan antara dua model tersebut model manakah yang memiliki tingkat akurasi yang lebih tinggi untuk mempertimbangkan tingkat return dan risikonya. Metode yang digunakan dalam penelitian ini adalah deskriptif komparatif dengan pendekatan kuantitatif. Adapun data yang digunakan adalah data berupa laporan keuangan tahunan (annual report) Indeks IDX30 periode 2016 – 2018. Hasil penelitian ini menunjukkan bahwa Metode Capital Asset Pricing Model merupakan model yang lebih akurat dibandingkan Fama-French Three Factor Model. Selain terlihat sederhana, model Capital Asset Pricing Model ini juga lebih akurat dalam menentukan investasi sesuai dengan tingkat pengembalian yang diharapkan dan risiko yang bersedia ditanggung dan model ini dapat memberikan informasi secepat-cepatnya mengenai tingkat pengembalian dan risiko yang akan ditanggung investor. Kata-kata Kunci:Metode Capital Asset Pricing Model, Fama-French Three Factor Model, dan Indeks IDX30. 

scholarly journals Downside CAPM: The case of South Africa

2017 ◽  
Vol 9 (2) ◽  
pp. 578-608
Author(s):  
Kwasi Okyere-Boakye ◽  
Brandon O’Malley
Keyword(s):  
Asset Pricing ◽  
Risk Measures ◽  
Downside Risk ◽  
Capital Asset Pricing Model ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Capital Asset ◽  
Asset Pricing Model ◽  
Risk Framework ◽  
Measures Of Risk

Beta and the capital asset pricing model have traditionally been the preferred measures of risk. However, there is growing literature against the use of the capital asset pricing model to determine the cost of equity in markets, such as emerging markets, where investors display mean-semivariance behaviour and, where share returns are non-normal and asymmetric. Downside risk measures such as semideviation, downside beta and the downside capital asset pricing model have been found to be plausible alternate measures of risk. This study investigates empirically the relationship between risk and return in a downside risk framework and a regular risk framework using returns on companies listed on the JSE Securities Exchange. The empirical evidence from this study indicates that while downside beta and semideviation significantly explain the variation in returns, they do not support them as being more appropriate measures of risk over beta and standard deviation.

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

2017 ◽  
Vol 16 (4) ◽  
pp. 231-256 ◽  
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.

Comparison of the Capital Asset Pricing Model and the Three-Factor Model in a Business Cycle: Empirical Evidence from the Vietnamese Stock Market

2020 ◽  
Vol 36 (2) ◽  
Author(s):  
Luong Tram Anh
Keyword(s):  
Asset Pricing ◽  
Factor Model ◽  
Capital Asset Pricing Model ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Capital Asset ◽  
Asset Pricing Model ◽  
Using Data ◽  
The Cost ◽  
Three Factor

Using data from 2010 to 2019, for the first time, the Capital Asset Pricing Model (CAPM) and the Three-factor Model (TFM) are compared in different contexts of the Vietnamese economy (recession and recovery). This paper employs four tests including the t-test, determination coefficient R2, Chow-test and GRS-test to examine the performance of the two models. Results show the superiority of the TFM over the CAPM in both contexts of the economy, consistent with Fama and French’s studies. This promises that the TFM can be used to replace the CAPM in capturing the cost of equity. Another finding is that the two models tend to perform better in recession than recovery. This study contributes to the literature about asset-pricing models and their performances in different economic contexts. Moreover, the findings also offer insights into the use of the CAPM and TFM in developing countries in general and Vietnam, in particular.

scholarly journals The Myth of Downside Risk Based Capital Asset Pricing Model: Empirical Evidence from South Asian Countries

2018 ◽  
Vol III (III) ◽  
pp. 265-280
Author(s):  
Syed Aziz Rasool ◽  
Adiqa Kausar Kiani ◽  
Noor Jehan
Keyword(s):  
Asset Pricing ◽  
South Asian ◽  
Equity Markets ◽  
Downside Risk ◽  
Capital Asset Pricing Model ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Asian Countries ◽  
Capital Asset ◽  
Asset Pricing Model

The study aims to empirically investigate the applicability of the downside risk based Capital Asset Pricing Model (CAPM) for four south Asian countries e.g. Bangladesh, India, Pakistan and Sri Lanka. Fama-MacBeth methodology is used for monthly data from January 2007 to December 2017. The results partially supported the predictors of the model for all the four equity markets and can be concluded that the downside risk based CAPM better suits the emerging equity markets. All market players may be benefited with the results concluded in the study. The region have large similarities and the setup of the equity markets is also quite identical, making them suitable for an integrated stock market.

scholarly journals Custo de capital próprio em mercados emergentes: uma abordagem empírica no Brasil com o downside risk

2010 ◽  
Vol 11 (1) ◽  
pp. 92-116 ◽  
Author(s):  
Graziela Xavier Fortunato ◽  
Luiz Felipe Jacques da Motta ◽  
Giuseppe Russo
Keyword(s):  
Asset Pricing ◽  
Cross Section ◽  
Downside Risk ◽  
Capital Asset Pricing Model ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Capital Asset ◽  
Asset Pricing Model

Este artigo visa testar empiricamente a proposta de Estrada (2000) para as empresas que compõem o Ibovespa, avaliando se para mercados emergentes existem outras medidas de risco sistemático diferentes do beta do capital asset pricing model (CAPM). Dessa forma, testou-se o downside risk que capta a parte negativa do retorno. Além de dados em cross section, utilizaram-se dados em painel, como uma contribuição adicional ao trabalho de Estrada (2000). Os resultados encontrados não confirmam que o downside risk seja uma medida apropriada ao mercado brasileiro. Outras medidas de risco apresentaram melhor correlação com o retorno, permitindo o cálculo do custo de capital com valor diferente daquele obtido pela aplicação do beta. De acordo com Estrada (2000), os resultados sugerem que os mercados emergentes estão em posição intermediária entre os mercados integrados e segmentados, tal como confirmado para o mercado brasileiro.

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