Further evidence on the validity of CAPM: The Warsaw Stock Exchange application

• Authors: Markowski Lesław
• Languages of publication: EN

Abstracts

EN

Aim/purpose – The purpose of the research is to verify the Capital Asset Pricing Model (CAPM) in the Polish capital market based on a conventional and downside risk approach. Design/methodology/approach – The author in this study, using individual securities and portfolios, compares the unconditional risk-return relationships with the conditional risk, estimated in up and down market using realised returns in cross-sectional regressions. Except for a beta coefficient, the CAPM is tested with co-skewness as a higher order co-moment and downside betas as a risk measure in a downside approach. Findings – The unconditional regressions give evidence of existing risk premium associated with co-skewness and downside beta, and confirmed the validity of the downside CAPM. The author, based on conditional relations, found that risk-return relations depend on the state of the stock market. The average premium for systematic risk in term of beta coefficient is significantly positive in up market periods and significantly negative in down market periods. The use of conditional models did not explicitly confirm the suitability of co-skewness in asset pricing. Research implications/limitations – The main implications include the fact that the conventional beta coefficient is an appropriate risk measure when we consider using it separately for up and down market. A valuable extension of this research would be a benchmarking analysis to compare results for the Polish capital market against other emerging and developed markets. Originality/value/contribution – The author in this paper proposes an alternative approach to testing risk-return relationships based on the CAPM in comparison to commonly used tests founded upon joint estimations of these relationships in periods of both positive and negative market excess return. The noteworthy contribution of this study is an application of the downside beta coefficient and the co-skewness coefficient in crosssectional regressions.

Keywords

EN

Capital Asset Pricing Model (CAPM); Conditional relationship; Co-skewness; Downside risk

• Publisher: Uniwersytet Ekonomiczny w Katowicach
• Journal: Journal of Economics and Management
• Year: 2020
• Volume: 39
• Pages: 82-104

Contributors

author

Markowski Lesław

• Department of Finance. Faculty of Economic Sciences. University of Warmia and Mazury in Olsztyn, Poland

References

• Alles, L., & Murray, L. (2013). Rewards for downside risk in Asian markets. Journal of Bank and Finance, 37(7), 2501-2509. https://doi.org/10.1016/j.jbankfin.2013.02.006
• Ang, A., Chen, J., & Xing, Y. (2006). Downside risk. The Review of Financial Studies, 19(4), 1191-1239. https://doi.org/10.1093/rfs/hhj035
• Barone-Adesi, G. (1985). Arbitrage equilibrium with skewed asset returns. Journal of Financial and Quantitative Analysis, 20(3), 299-313. https://doi.org/10.2307/2331032
• Bawa, V. S., & Lindenberg, E. B. (1977). Capital market equilibrium in a mean-lower partial moment framework. Journal of Financial Economics, 5(2), 189-200. https:// doi.org/10.1016/0304-405X(77)90017-4
• Bekaert, G., Erb, C. B., Harvey, C. R., & Viskanta, T. E. (1998). Distributional characteristics of emerging market returns and asset allocation. Journal of Portfolio Management, 24(2), 102-116. https://doi.org/10.3905/jpm.24.2.102
• Będowska-Sójka, B., & Kliber, A. (2019). The causality between liquidity and volatility in the Polish stock market. Finance Research Letters, 30, 110-115. https://doi.org/10.1016/j.frl.2019.04.008
• Bilgin, R., & Basti, E. (2014). Further evidence on the validity of CAPM: The Istanbul stock exchange application. Inzinerine Ekonomika-Engineering Economics, 25(1), 5-12. https://doi.org/10.5755/j01.ee.25.1.1847
• Cheng, P. (2005). Asymmetric risk measures and real estate returns. Journal of Real Estate Finance and Economics, 30(1), 89-102. https://doi.org/10.1007/s11146-004-4833-9
• Cheung, Y.-L., & Wong, K.-T. (1992). An assessment of risk and returns: Some empirical findings from the Hong Kong Stock Exchange. Applied Financial Economics, 2(2), 105-114. https://doi.org/10.1080/758536014
• Chhapra, I. U, & Kashif, M. (2019) Higher co-moments and downside beta in asset pricing. Asian Academy of Management Journal of Accounting and Finance, 15(1), 129-155. https://doi.org/10.21315/aamjaf2019.15.1.6
• Chiang, I-H. E. (2016). Skewness and coskewness in bond returns. Journal of Financial Research, 39(2), 145-178. https://doi.org/10.1111/jfir.12093
• Duc, T. H. L, & Nguyen, S. P. (2018). Higher co-moments and asset pricing on emerging stock markets by quantile regression approach. Business and Economic Horizons, 14(1), 132-142. https://doi.org/10.15208/beh.2018.11
• Estrada, J. (2002). Systematic risk in emerging markets: The D-CAPM. Emerging Markets Review, 3(4), 365-379. https://doi.org/10.1016/S1566-141(02)00042-0
• Estrada, J. (2007). Mean-semivariance behaviour: Downside risk and capital asset pricing. International Review of Economics & Finance, 16(2), 169-185. https://doi.org/10.1016/j.iref.2005.03.003
• Fabozzi, F. J., & Francis, J. C. (1977). Stability tests for alphas and betas over bull and bear market conditions. The Journal of Finance, 32(4), 1093-1099. https://doi.org/10.1111/j.1540-6261.1977.tb03312.x
• Fama, E. (1970). Efficient capital markets: A review of theory and empirical work. Journal of Finance, 25(2), 384-417. https://doi.org/10.1111/j.1540-6261.1970.tb00518.x
• Fama, E. F., & MacBeth, J. D. (1973). Risk, return and equilibrium: Empirical tests. Journal of Political Economy, 81(3), 607-636. https://doi.org/10.1086/260061
• Fernandes, A. R. de J., Fonseca, S. E., & Iquiapaza R. A. (2018). Performance measurement models and their influence on net fundraising of investment funds. Revista Contabilidade & Finanças, 29(78), 435-451. https://doi.org/10.1590/1808-057x201805330
• Fletcher, J. (2000). On the conditional relationship between beta and return in international stock returns. International Review of Financial Analysis, 9(3), 235-245. https://doi.org/10.1016/S1057-5219(00)00030-2
• Galagedera, D. U. A., Henry, D., & Silvapulle, P. (2003). Empirical evidence on the conditional relation between higher-order systematic co-moments and security returns. Quarterly Journal of Business and Economics, 42(1/2), 121-137. Retrieved from https://www.jstor.org/stable/40473367
• Galagedera, D. U. A., & Faff, R., (2005). Modeling the risk and return relations conditional on market volatility and market condition. International Journal of Theoretical and Applied Finance, 8(1), 75-95. https://doi.org/10.1142/S0219024905002901
• Harlow, W. V., & Rao, R. K. S. (1989). Asset pricing in a generalized mean-lower partial moment framework: Theory and evidence. Journal of Financial and Quantitative Analysis, 24(3), 285-311. https://doi.org/10.2307/2330813
• Harvey, C. R., & Siddique, A. (1999). Autoregressive conditional skewness. Journal of Financial and Quantitative Analysis, 34(4), 465-487. https://doi.org/10.2307/2676230
• Hogan, W. W., & Warren, J. M. (1974). Toward the development of an equilibrium capital-market model based on semivariance. Journal of Financial and Quantitative Analysis, 9(1), 1-11. https://doi.org/10.2307/2329964
• Jagannathan, R., & Wang, Z. (1996). The conditional CAPM and the cross-section of expected returns. Journal of Finance, 51(1), 3-53. https://doi.org/10.1111/j.15406261.1996.tb05201.x
• Kraus, A., & Litzenberger, R. H. (1976). Skewness preference and the valuation of risk assets. Journal of Finance, 31(4), 1085-1100. https://doi.org/10.1111/j.15406261.1976.tb01961.x
• Lee, Ch. L., Robinson, J., & Reed, R. (2008). Downside beta and the cross-sectional determinants of listed property trust returns. Journal of Real Estate Portfolio Management, 14(1), 49-62. Retrieved from https://www.jstor.org/stable/24883130
• Lintner, J. (1965). The valuation of risk assets and the selection of risky investments in stock portfolio and capital budgets. Review of Economics and Statistics, 47(1) 13-37. https://doi.org/10.2307/1924119
• Markowitz, H. (1959). Portfolio selection: Efficient diversification of investments. New York: Wiley. Retrieved from https://trove.nla.gov.au/version/260173474
• Mora-Valencia, A., Perote, J., & Arias, J. E. T. (2017). The return performance of cubic market model: An application to emerging market. Emerging Markets Finance & Trade, 53(10), 2233-2241. https://doi.org/10.1080/1540496X.2016.1251902
• Mossin, J. (1966). Equilibrium in a capital asset market. Econometrica, 34(4), 768-783. https://doi.org/10.2307/1910098
• Neslihanoglu, S., Sogiakas, V., McColl, J. H., & Lee, D. (2017). Nonlinearities in the CAPM: Evidence from developed and emerging markets. Journal of Forecasting, 36(8), 867-897. https://doi.org/10.1002/for.2389
• Nurjannah, Galagedera, D. U. A., & Brooks, R. (2012). Conditional relation between systematic risk and returns in the conventional and downside frameworks: Evidence from the Indonesian market. Journal of Emerging Market Finance, 11(3), 271-300. https://doi.org/10.1177%2F0972652712466498
• Ostermark, R. (1991). Empirical evidence on the capital asset pricing model in two Scandinavian stock exchanges. Omega, 19(4), 223-234. https://doi.org/10.1016/ 0305-0483(91)90041-Q
• Pedersen, Ch. S., & Hwang, S. (2007). Does downside beta matter in asset pricing? Applied Financial Economics, 17(12), 961-978. https://doi.org/10.1080/09603100701217861
• Pettengill, G. N., Sundaram, S., & Mathur, I. (1995). The conditional relation between beta and returns. Journal of Financial and Quantitative Analysis, 30(1), 101-116. https://doi.org/10.2307/2331255
• Piasecki, K., & Tomasik, E. (2013). Rozkłady stóp zwrotu z instrumentów polskiego rynku kapitałowego [Distribution of rates of return on the Polish capital market instruments]. Kraków-Warszawa: edu-Libri.
• Post, T., & van Vliet, P. (2006). Downside risk and asset pricing. Journal of Banking and Finance, 30(3), 823-849. https://doi.org/10.1016/j.jbankfin.2005.06.005
• Rashid, A., & Hamid, F. (2015). Downside risk analysis of returns on the Karachi Stock Exchange. Managerial Finance, 41(9), 940-957. https://doi.org/10.1108/MF-09-2014-0245
• de Roon, F., & Karehnke, P. (2017). A simple skewed distribution with asset pricing applications. Review of Finance, 21(6), 2169-2197. https://doi.org/10.1093/rof/rfw040
• Scot, R. C., & Horvath, P. A. (1980). On the direction of preference for moments of higher order than the variance. Journal of Finance, 35(4), 915-919. https://doi.org/10.1111/j.1540-6261.1980.tb03509.x
• Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance, 19(3), 425-442. https://doi.org/10.1111/j.1540- 6261.1964.tb02865.x
• Tang, G. Y. N., & Shum, W. C. (2003). The conditional relationship between beta and returns: Recent evidence from international stock markets. International Business Review, 12(1), 109-126. https://doi.org/10.1016/S0969-5931(02)00090-2
• Teplova, T., & Shutova, E. (2011). A higher moment downside framework for conditional and unconditional CAPM in the Russian Stock Market. Eurasian Economic Review, 1(2), 157-178. https://doi.org/10.14208/BF03353829
• Theriou, N. G., Aggelidis, V. P., Maditinos, D. I., & Šević, Ž. (2010). Testing the relations between beta and returns in the Athens stock exchange. Managerial Finance, 36(12), 1043-1056. https://doi.org/10.1108/03074351011088441
• Thuy, T. T. T., & Kim, J. (2018). Sustainability managed against downside risk and the cost of equity: Evidence in Korea. Sustainability, 10(11), 3669, 1-18. https:// doi.org/10.3390/su10113969
• Trzpiot, G., & Krężołek, D. (2006). Statystyczna weryfikacja modelu CAPM na przykładzie polskiego rynku kapitałowego [Statistical verification of the CAPM on the example of the Polish capital market]. Zeszyty Naukowe SGGW w Warszawie Ekonomika i Organizacja Gospodarki Żywnościowej, (60), 341-351. Retrieved from http://sj.wne.sggw.pl/article-EIOGZ_2006_n60_s341
• Xu, P., & Pettit, R. (2014). No-arbitrage conditions and expected returns when assets have different β’s in up and down markets. Journal of Asset Management, 15(1), 62-71. https://doi.org/10.1057/jam.2014.9
• Żarnowski, J., & Rutkowska, J. (2012). Stopy zwrotu z portfeli sortowanych według współczynnika beta z modelu CAPM na przykładzie akcji notowanych na Giełdzie Papierów Wartościowych w Warszawie w latach 1998-2010 [Rates of return from portfolios sorted by the beta coefficient from the CAPM on the example of shares listed on the Warsaw Stock Exchange in the years 1998-2010]. Zeszyty Naukowe, Polskie Towarzystwo Ekonomiczne, Kraków, (13), 249-258. Retrieved from http://www.krakow.pte.pl/pliki/zn-pte-nr-13/zn-13zarnowski-rutkowska.pdf

Identifiers

ISSN

1732-1948