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Capital Market Equilibrium With Restricted Borrowing
... The model has been widely utilized in performance assessments, estimation of capital cost, portfolio selection, and measurement of abnormal returns. The CAPM has been considered an important turning point in modern finance theory since it was developed by Sharpe (1964), Lintner (1965), Mossin (1966), and Black (1972). The market model of William Sharpe (1964) was formulated as follows: ...
... In the new Capital Asset Pricing Model developed by Black (1972), unlike the previous model developed by Sharpe, Lintner, and Mossin; the assumption of risk-free borrowing and lending was included. Basu (1977) considered different time-series models and explained that the returns were positive and linear by associating them with the β coefficient. ...
... The first model of the field, as mentioned in the introduction part of the study, was Markowitz's (1952) modern portfolio theory. The process continued with the capital assets pricing model (CAPM) developed with the contributions of Sharpe (1964), Lintner (1965), and Black (1972). Following these studies, Fama and French (1993) Fama ve French (2017), in which the Fama-French Five-Factor Asset Pricing Model was tested in the North American, European, Japanese, and Asian Pacific Stock Markets, detected that investments were negatively related to the returns whereas the increase in both the Book Equity / Market Equity ratio and profitability boosted the average returns in North America, Europe, and the Asia Pacific. ...
This study aims to test the validity of the Fama-French Five-Factor Model (FF5F) for Turkey. Within the scope of the study, throughout 468 weeks between September 2009 and August 2018, the returns over the risk-free interest rate of 18 different intersection portfolios are used based on value, profitability, and investment factors. A total of 8424 portfolios (18 portfolios x 468 weeks) are generated in the study. As a result of the analyses, it is determined that the Five-Factor Asset Pricing Model is valid for Borsa İstanbul. Subsequently, it is concluded that the Fama-French Five-Factor Model has a higher explanatory power in describing the stock returns of the portfolios formed with stocks of small-scale companies compared to the portfolios formed with stocks of large-scale companies. The findings are consistent with the literature.
... Contradicting the CAPM, the operation of capital markets is more sophisticated, and it is practically impossible to capture all the fluctuations using a single-factor model. Black (1972), Fama and MacBeth (1973), Ross (1976), Banz (1981), Basu (1983), Shanken (1985), Bhandari (1988), and Khandelwal and Chotia (2022), among others, provided critiques and challenges to the CAPM. Along with beta, using the size of the company as another important variable that helps explain expected portfolio returns was argued by Fama This study is organized as follows. ...
... Contradicting the CAPM, the operation of capital markets is more sophisticated, and it is practically impossible to capture all the fluctuations using a single-factor model. Black (1972), Fama and MacBeth (1973), Ross (1976), Banz (1981), Basu (1983), Shanken (1985), Bhandari (1988), and Khandelwal and Chotia (2022), among others, provided critiques and challenges to the CAPM. Along with beta, using the size of the company as another important variable that helps explain expected portfolio returns was argued by Fama and French (1988, 1992, 1993) along with Gibbons et al. (1989) and Lo and MacKinlay (1990). ...
Disclosing information on environmental, social, and governance (ESG) parameters is voluntary for most firms across the world. Companies disclose their performance on ESG datapoints due to two main reasons—(i) to gain the trust of stakeholders through increased transparency and (ii) to comply with regulations imposed by governments and investment houses. Using a dataset of companies disclosing ESG parameters during 2014–2021 from the S&P BSE 500 index, this study investigates the role of ESG disclosure on firm performance. We divide the constituent securities into three factors—size, value, and disclosure to study the premiums generated by firms on each factor using single-, double-, and triple-sorting approaches. We utilize time series regressions along with GRS tests to empirically test the presence of factor premiums. We find the significant role of factors size, value, disclosure, and a dummy variable for the COVID-19 pandemic period to explain the portfolio returns. The study found a negative ESG disclosure premium stating that firms with high levels of disclosure earn less returns compared with the firms with less disclosures. The findings of this study contrast with multiple studies in the past that have found a positive disclosure premium. Our findings help reconcile the mixed evidence on the disclosure–returns relationship.
... Ancak risksiz borç alıp borç verme gerçekçi olmayan bir varsayımdır ve CAPM daha sonradan Black (1972) tarafından risksiz borç alıp borç verme olmaksızın modifiye edilmiştir. Fama ve French (2004) tarafından belirtildiği şekilde, Black (1972)'in geliştirdiği modelin ilk versiyona kıyasla daha başarılı olduğu söylenebilmektedir (Rossi, 2016: 608-614). ...
... Ancak risksiz borç alıp borç verme gerçekçi olmayan bir varsayımdır ve CAPM daha sonradan Black (1972) tarafından risksiz borç alıp borç verme olmaksızın modifiye edilmiştir. Fama ve French (2004) tarafından belirtildiği şekilde, Black (1972)'in geliştirdiği modelin ilk versiyona kıyasla daha başarılı olduğu söylenebilmektedir (Rossi, 2016: 608-614). ...
Bu çalışmada, otoregresif arbitraj fiyatlama ve otoregresif sermaye varlıklarını fiyatlama modelleri, Türkiye’deki bankacılık sektörünün hisse senedi getirilerinin haftalık verileri kullanılarak birbiriyle kıyaslanmıştır. Bu çerçevede 5 bankanın hisse senedi getirileri araştırılmıştır. Çalışma kapsamındaki analiz sonuçlarına göre, otoregresif arbitraj fiyatlama modelinin ve otoregresif sermaye varlıklarını fiyatlama modelinin hisse senedi getirilerini tahmin ederken benzer sonuçlar ürettiği sonucuna ulaşılmıştır. Ayrıca, bir banka haricinde diğer bankaların getiri oranlarını açıklamada, birinci dereceden otoregresif değişken katsayısı her iki modelde de anlamlı çıkmamıştır.
... As such CAPM was not entirely rejected. Black, F. (1972) proposes a modified version of the CAPM where the model's assumption of borrowing at risk-free rate is relaxed. ...
This study examines the validity of the Capital Assets Pricing Model (CAPM) using monthly data obtained from Yahoo Finance, on 1320 stocks listed on New York Stock Exchange Market for period of2000M01 to 2014M01, under the first-pass/second-pass methodology. The Rolling OLS Methodology is adopted, where returns and betas are assumed to be time-varying. 40 value-weighted portfolios of 33 stocks each are constructed on the monthly returns computed. The study fills-in a gap observed in the literature regarding empirical tests of the model, as no study is found in the literature using the Rolling OLS (Ordinary Least Square)methodology in testing the CAPM with a large number of stocks. Previous studies are observed to be carried out either using the static OLS methodology, or where the betas and assets returns are time-varying, then the ARCH/GARCH, Kalman filters or other methodologies are used. A look into the literature also shows that most empirical evaluations of the model carried out, either use a relatively small number of observations (especially the inputs for the second-pass regression, in the case of using portfolios) or use wrongly constructed portfolios which divert from the theoretical assumptions-hence invalidating the results. In consistency with the CAPM predictions, this study finds that the rolling OLS methodology provides evidence that non-systematic risks command no premium. We also find that the Security Market Line (SML) estimation using the rolling OLS methodology providessteeper slope-in contrast with previous studies using other methodologies-as the average of beta coefficients from the rolling OLS methodology is estimated to be lower than the average historical market excess return.Moreover, adopting the rolling OLS methodology, wealso find evidence that the expected return-beta relationshipis linear. Adopting the Rolling OLS Technique in Testing the Capital Asset Pricing Model (CAPM) By Habib Abdulkarim
... On the other hand, companies that reduce dividends significantly might be viewed as taking on higher levels of risk, such as pursuing growth opportunities or addressing financial challenges. The riskreturn trade off framework helps explain the relationship between dividend changes and risk and its implications for investors' risk perception (e.g., Black, 1972;Sharpe, 1964;Yao et al., 2020). ...
In this research paper we used prospect theory (PT) to analysis the association between risk and dividend changes. We used global index (24 countries index data) data from 2000 to 2021. To improve PT, we suggest a novel alternative to the traditional reference point. Reference was established by tracking dividend growth or declines across sectors. The assumption is that before the end of the period, all the firms’ industrial dividend changes have to be known. In this research we calculated our reference point separately for individual years because the mean of industry dividend changes in the previous year. We utilised GMM estimation for the robustness test and split our sample up by business size, and we used 3 empirical methods (pooled regression, industry regression, and cross-sectional regressions analysis). Using the aforementioned empirical methods, we determined that dividend fluctuations are significantly correlated with a decrease in a company's risk. These findings imply that companies whose dividend changes are more than (less than) their benchmark will take on more (less) risk.
... Traditional finance theories proposed by great scholars (Black, 1972;Black & Scholes, 1974;Lintner, 1965;Markowitz, 1952Markowitz, , 1959Miller & Modigliani, 1961;Sharpe, 1964) are based on the assumptions that (a) investors are always rational (b) information is equally available to all investors and (c) prices remain fair in the markets. The proponents of these assumptions claim that they provide a simple and understandable explanation of the market phenomena and are applicable in different market conditions, but these theories have failed to give a valid explanation of observed fluctuations in the market asset prices in diverse economic states. ...
The study is aimed to investigate the impact of investor sentiment on returns of selected emerging equity markets i.e., Brazil, India, China, Russia, Indonesia, and Pakistan using non-linear predictive regression analysis. Principal Component Analysis is used to generate investor sentiment index. Investor sentiment has a significant impact on current market returns and this influence is continued in the short run in most of the sample countries. However, the impact of sentiment is not much pronounced in the longer run. Therefore, decision-makers cannot ignore sentiments in at least the short run. The findings of this study may be helpful for investors to better understand the market trends under the influence of sentiments and portfolio managers and risk professionals can devise their strategies accordingly.
JEL: G02, G15, G24, M41
... Black [6] modifies Sharpe's model by introducing restricted borrowing, and Ross [7] derives an arbitrage theory of asset pricing. Breeden [8] derives a consumption-based asset pricing model. ...
... Effective Diversification of Investment," published by Markowitzin (1991) in the "Financial Monthly" in the 1950s. On this basis, Sharpe (1964), Lintner (1975), and Mossin (1966) independently proposed the CAPM ________ model is too harsh, financial economists have made a lot of attempts to relax restrictions and have proposed many improved CAPM modelsfor example: Black's (1972) "Zero Beta CAPM" model; Brennan's (1971) "CAPM with unequal borrowing or lending rates"; and "CAPM with inflation" proposed by Friend (Friend et al., 1976). The above theoretical models are all based on single-period economic assumptions. ...
This paper investigates the asset pricing problem in the context of asymmetric information, focusing on the asset chain, and derives an expression for equilibrium asset prices. The findings of this study contribute to our understanding of how information asymmetry affects asset prices and can be used to inform investment decisions in markets with asymmetric information. Future research could explore the implications of these results for other types of assets or for different market conditions. Moreover, policymakers and regulators could also use these findings to design better disclosure requirements and improve market transparency, which could ultimately benefit investors and promote market efficiency. It is essential to continue investigating the impact of information asymmetry on asset prices to develop a more comprehensive understanding of financial markets. Using this equilibrium price expression, the author demonstrates that asset chain-based pricing can help mitigate the volatility of the equilibrium price. This finding could have significant implications for investors and policymakers seeking to stabilize asset prices in volatile markets. Further research could also investigate the practical applications of this pricing model in real-world investment scenarios. The study sheds light on the role of asymmetric information in asset pricing and highlights the potential benefits of asset chain-based pricing.
... The assumption of risk-free borrowing and lending was so unrealistic that Fischer Black (1972) developed a version of the CAPM without it, by allowing unrestricted short sales of risky assets instead. In other words, Black was able to show that the market portfolio is efficient and it represents the minimum variance portfolio. ...
The Austrian economists are well known for their theory of the stages and periods of production. Less well known is that in the 1920s and 1930s, several members of the Austrian School -- Hans Mayer, Paul N. Rosenstein-Rodan, and Oskar Morgenstern -- also contributed to an "Austrian" Theory of Consumption Period Planning. This essay explains and traces out their ideas, and why it remained an unfinished theory of intertemporal consumer choice.
... Black developed a slightly different version of CAPM in [31], which is known as Black CAPM or Zero-Beta CAPM. The model does not assume a riskless asset, and, furthermore, includes restrictions on borrowing. ...
Risk measures and acceptance sets are important subjects in research, which are based on the axiomatic framework introduced by Artzner et al. in 1999. In the current environment of increasing regulatory demands on financial institutions with respect to their capital and risk positions, optimal financial decisions are crucial. This thesis makes an important contribution to the determination of cost-minimal investment decisions for fulfilling regulatory restrictions. The focus lies on the analysis of properties of the corresponding risk measure for deriving cost-minimal solutions of the institutional vector optimization problem afterwards. Moreover, we characterize (weakly) efficient points of the acceptance set and derive relationships to the solutions of the mentioned optimization problem. By assumption of a very general financial market model, we reach wide applicability in theory and practice.
... Besides, different proxies were used to represent the risk-free rate in evaluating the performance of Islamic portfolios, including the zero-beta portfolio by Black [26]; zakat rate by Ashker [27]; US Treasury Bill rate by Hakim and Rashidian [28], Hassan, Khan and Ngow [29]; the 1-year yield of AAA-rated sukuk and the removal of risk-free rate by Hakim, Hamid and Mydin Meera [30]; government bond yield by Hussin, Saring, Zahid et al. [31], Hoque, Rakhi, Hassan et al. [32]; United Arab Emirates Interest Rate by Bagheri [25]; Shariah-compliant risk-free references, such as Islamic interbank lending rates by Sandwick and Collazzo [15]. ...
This study proposes a novel Shariah-compliant portfolio optimization model tested on the daily historical return of 154 Shariah-compliant securities reported by the Shariah Advisory Council of Securities Commission Malaysia from 2011 to 2020. The mathematical model employs an annual rebalancing strategy subject to a Conditional Value-at-Risk (CVaR) constraint while considering practical and Islamic trading concerns, including transaction costs, holding limits, and zakat payment. To validate the model, the optimal portfolios are compared against an Islamic benchmark index, a market index, and portfolios generated by the mean-variance model, as well as a forecast accuracy test by the Mean Absolute Percentage Error and Mean Absolute Arctangent Percentage Error. Furthermore, this study examines the inter-stock relationship within the generated portfolios using correlation and Granger causality tests to identify the diversification performance. Results show an outperformance of the model in offering portfolios with higher risk-adjusted returns under a comparably short computational time and an indication of generally well-diversified portfolios by the weak correlations between securities. The study further noted that the model is adept at risk management in addition to higher forecast accuracy during financial crises by showing remarkably fewer causal relationships during bear markets in 2011, 2014, and 2020. The findings of an inversed relationship between portfolio risk and the number of causalities between securities offer new insights into the effect of dynamic relationships between securities on portfolio diversification. In conclusion, the proposed model carries higher moral and social values than the conventional models while portraying high potential in enhancing the efficiency of asset allocation, contributing to economic diversification and the scarce literature on Islamic portfolio optimization modelling. The study also supports the substantially increasing demand for Shariah-compliant strategies following globalization and the changing demographic of the real financial world with growing priorities of social and sustainability values.
... Diversos autores han hecho nuevos cambios en el modelo clásico. Por ejemplo, Black (1972) desarrolla un modelo con una beta igual 0, es decir, que su modelo se basa en la existencia de una cartera donde el activo libre de riesgo no se da siempre como condición necesaria. También hay otros planteamientos dentro de los que se encuentran Rubinstein (1976), Lucas (1978) y Breeden (1979) quienes plantean un CAPM basado en el consumo y su principal diferencia radica en que la beta se mide con respecto a la riqueza agregada del consumo; lo anterior se define bajo las rentabilidades de los activos con el consumo agregado. ...
El presente artículo consiste en la aplicación del modelo CAPM sobre las empresas que cotizan en la bolsa de valores y están relacionadas al sector de la construcción en Colombia durante el periodo del 1 de enero del 2015 hasta el 31 de diciembre del 2020. Esta investigación tiene un enfoque cuantitativo con un tipo de investigación descriptiva y longitudinal. Su metodología consistió en la aplicación de mínimos cuadrados ordinarios a las volatilidades diarias del activo en función de la estimación de los betas, los cuales cumplieron en su mayoría con los valores probabilísticos y los interceptos no eran diferentes de 0, lo que es coherente con la hipótesis del modelo. En cuanto a las variables que acompañan el modelo se escogió la tasa libre de riesgo TFIT16240724 y como variable que mide el riesgo de mercado al índice ICOLCAP. Finalmente, obtenidos los resultados, estos fueron evaluados, concluyéndose que el coeficiente beta es un indicador aceptable en la valoración riesgo-rentabilidad del activo durante el periodo en cuestión, más sin embargo como estimador no es efectivo, lo que refleja la poca eficacia del modelo.
... However, there is some disagreement over whether or not CAPM should be employed in practical investing contexts. Black [2] performed one of the first experimental CAPM experiments, establishing a linear relationship between expected return and portfolio risk, but with a slope coefficient too flat to be deemed important. Dhankar [3] conducted studies using data from 158 small business stocks traded between 1991 and 2002. ...
... al., 1969;Pan and Poteshman 2006;Reboredo 2013). 16 Black's (1972) version is adopted. 17 This argument is only valid for the players in the stock market as these premiums are relevant, for example, for prospective (future) investors to the stock market such as bank depositors (See e.g. ...
There is no procedure available in the existing literature to test for heteroskedastic mixture of distributions of residuals drawn from ordinary least squares regressions. This is the first paper that designs a simple test procedure for detecting heteroskedastic mixture of ordinary least squares residuals. The assumption that residuals must be drawn from a homoscedastic mixture of distributions is tested in addition to detecting heteroskedasticity. The test procedure has been designed to account for mixture of distributions properties of the regression residuals when the regressor is drawn with reference to an active market. To retain efficiency of the test, an unbiased maximum likelihood estimator for the true (population) variance was drawn from a log-normal normal family. The results show that there are significant disagreements between the heteroskedasticity detection results of the two auxiliary regression models due to the effect of heteroskedastic mixture of residual distributions. Forecasting exercise shows that there is a significant difference between the two auxiliary regression models in market level regressions than non-market level regressions that supports the new model proposed. Monte Carlo simulation results show significant improvements in the model performance for finite samples with less size distortion. The findings of this study encourage future scholars explore possibility of testing heteroskedastic mixture effect of residuals drawn from multiple regressions and test heteroskedastic mixture in other developed and emerging markets under different market conditions (e.g. crisis) to see the generalisatbility of the model. It also encourages developing other types of tests such as F-test that also suits data generating process. Practitioners could minimize the risk of misrepresentation in advisory work by qualifying and disclaiming for possible pricing errors in cost of capital computations and valuations based on detection test results. Findings of this paper encourage stock exchanges and governments to effectively promote firm-specific trading by, for example, timely discloser of corporate announcements and investor education programs, to improve functional efficiency of stock markets.
... Standard finance theories proposed by great scholars [1][2][3][4][5][6][7] assume that investors are always rational, information is equally disseminated to all investors, prices remain fair in the markets, and consequently, investors cannot gain abnormal profits. The followers of these assumptions claim that these theories provide a simple and understandable explanation of the market phenomena and are applicable to different market conditions. ...
This study uses Non-linear Predictive Regression Analysis to analyze the effect of investor sentiment on the returns of the selected developing equity markets, including Brazil, South Africa, Indonesia, India, China, Russia, and Pakistan. The Principal Component Analysis is applied to construct an Investor Sentiment Index. In most selected countries, investor sentiment substantially affects contemporaneous market returns, and this effect remains persistent in the short term. However, it becomes less prominent over time. It suggests that stakeholders should give importance to the investors' sentiments while making investment decisions.
... The MV portfolio selection problem is one where the investor seeks to minimize the portfolio variance subject to the budget and target return constraint. A short selling, Black [36] non-negativity constraint is optional, depending on the model (Buckle [37] utilized a bivariate normal distribution due to option payoffs). Simply stated, the problem is to ...
This paper looks at the GRS-Wald test for portfolio efficiency and recasts it geometrically. The test statistic draws upon the trigonometric properties of a portfolio in the mean-variance space and a mathematical proof of the equivalence of the two statistics is provided. The GRS-Wald test is a widely used statistic in studies addressing the issue of portfolio efficiency and CAPM deviations. A simulation demonstrates the use of the recast GRS-Wald test in testing for the mean-variance efficiency of a test portfolio. The study also provides a table of the GRS-Wald test, based on a range of mean-variance locations (cosine of portfolio angles) at which the test portfolio and the efficient market portfolio can be placed. *This is from a chapter in my dissertation at Alabama, and was also awarded the Best Doctoral paper award at SWFA, San Antonio, in 1996
... Chang và cộng sự (2000) đề xuất sử dụng độ lệch chuẩn tuyệt đối tỷ suất sinh lợi chéo giữa cổ phiếu riêng lẻ và danh mục thị trường (Cross-sectional Absolute Deviation -CSAD) để phát hiện hành vi đám đông. Ý tưởng đo lường này xuất phát từ mô hình định giá tài sản CAPM trong nghiên cứu của Black (1972). Theo mô hình định giá tài sản CAPM, tỷ suất sinh lợi của chứng khoán Có nhiều yếu tố có thể ảnh hưởng đến quyết định của nhà đầu tư khi tham gia vào thị trường chứng khoán như tầm nhìn đầu tư, các tiêu chuẩn được sử dụng để đo lường khả năng sinh lời, hành vi của những chủ thể khác cùng tham giá trên thị trường, sự hiện diện của các xu hướng đầu tư và hoạt động giao dịch đầu cơ trên thị trường tài chính. ...
Nghiên cứu này sử dụng mô hình tuyến tính và phi tuyến được Chang và cộng sự (2000) đề xuất để phát hiện, so sánh mức độ hành vi đám đông trên thị trường chứng khoán trước, trong và sau khi dịch bệnh Covid-19 bùng phát ở Việt Nam. Kết quả nghiên cứu tìm thấy tồn tại hành vi đám đông trong mô hình phi tuyến, hành vi đám đông trên nhóm cổ phiếu VN30 mạnh hơn so với nhóm cổ phiếu còn lại niêm yết trên Sở Giao Dịch Chứng Khoán Thành Phố Hồ Chí Minh, hành vi đám đông khi thị trường giảm mạnh hơn khi thị trường tăng trong giai đoạn 2020-2021. Trong 4 lần bùng phát dịch bệnh Covid-19 ở Việt Nam trong thời gian 2020-2021, lần bùng phát thứ 3, hành vi đám đông trên VN30 vẫn mạnh hơn và gia tăng nhiều hơn khi thị trường có xu hướng tăng. Nghiên cứu cũng đề xuất tăng cường minh bạch thông tin, nâng cao ý thức tuân thủ đạo đức nghề nghiệp và xử lý nghiêm các trường hợp vi phạm pháp luật trên thị trường chứng khoán để giúp giảm hành vi đám đông. Kết quả nghiên cứu cung cấp thêm thông tin cho nhà đầu tư quan tâm đến thị trường chứng khoán Việt Nam, nhà quản trị công ty niêm yết và cơ quan quản lý cũng có thể tham khảo kết quả nghiên cứu để có thể điều chỉnh các yêu cầu về cung cấp thông tin của doanh nghiệp niêm yết.
... Contemporaneous to the first empirical findings that detected the low risk anomaly Black (1972) and Brennan (1971) showed in their theoretical works that a restriction on investor borrowing reduces the slope of the capital market line. This extension of the CAPM brings it closer to the empirical findings of that time. ...
It is well documented that less risky assets tend to outperform their riskier counterparts across asset classes. This paper provides a structured summary of the current state of literature regarding this so-called low-risk anomaly. It provides an overview of empirical findings across implementation methodologies and asset classes. Furthermore, it presents the most prevailing causes, which are namely exposure to other factors, coskewness risk, investor constraints, behavioral biases, and agency problems. The paper concludes that despite some critiques there are good reasons to believe that the low-risk anomaly can be evaluated as an investment factor. It also identifies that more research is required to disentangle the proposed causes to fully understand the big picture of the anomaly with certainty.
... We estimated the herding behaviour in automobile sector by using the Cross Sectional Absolute Deviation (CSAD) proposed by (Chang, Cheng, and Khorana 2000) despite of all other available alternative models because of its wide usage in previous researches (Espinosa-m and Arias 2021; Choi, Kang, and Yoon 2022; Chauhan et al., 2020; Choi and Yoon 2020; Chen, Wu, and Huang 2017), and it would be able to compare our results with the previous one. (Chang, Cheng, and Khorana 2000) started the model illustration by defining the variables from the theory of Capital Asset Pricing Model (CAPM) (Black, 1972). The equation for CSAD were estimated from this theory is: The CSAD model represents how much is the individual stock return is dispersed from the market average return. ...
... The inverted riskreturn relationship is consistent with the beta and volatility anomalies. According to the beta anomaly (Black, 1972;Black et al., 1972;Baker et al., 2011;Frazzini & Pedersen, 2014), the capital asset pricing model (CAPM) beta has no relationship or an inverted relationship with expected return in the cross-section. According to the volatility anomaly (Ang et al., 2006), the same is true for the relationship between return volatility and expected return. ...
In this paper, we describe how agency frictions in asset management can generate prime violations of the Efficient Markets Hypothesis, such as momentum, value and an inverted risk-return relationship. Momentum in our theory is associated with procyclical fund flows and price over-reaction, and is more pronounced for overvalued assets. The investors who generate the momentum and who are losing from it are those requiring their asset managers to keep their portfolios close to benchmark indices. Our theory suggests a rethinking of asset management contracts. Contracts should employ measures of long-run risk and return, and benchmark indices that emphasize asset fundamentals. There should also be greater transparency on managers’ choice of strategies.
... The notion of investors minimizing risk for a desired level of return is the basis of the capital asset pricing model (CAPM) developed by , and Black (1972). This model makes it possible to mathematically determine the so-called equilibrium return for holding a risky asset. ...
The opacity of the financial markets challenges us as citizens. The cascading financial arrangements leave us perplexed. Is this sector seriously in line with the Sustainable Development Goals (SDGs)? We all know that ‘money is the key’! We will need money to finance new, more environmentally friendly activities. This chapter shows how to involve civil society and more specifically citizens in the financing of this energy and sustainable transition, through the process of ‘crowdsourcing’. Unfortunately, the involvement of citizens in finance has been discarded for several decades in order to avoid any ethical questioning of the sector. Indeed, citizens are well known for challenging and informing about potential abuses of certain institutions. However, the sustainability of the sector must pass by more ‘accountability’ of the actors who compose it in front of these societal stakes. While many think that make economic, social and environmental issues cannot coexist, the history of finance suggests the opposite. There have already been several experimentations of more responsible financial tools. The financial sector’s commitment to human-scale projects that bring about societal innovations is essential in order to reach SDGs. The crowd allows a better representation of civil society for a better efficiency in the financing provided. During these support and financing phases, the projects financed are qualified as ‘collective’ as several stakeholders work in the formalization, start-up and monitoring of their activity. In the end, isn’t the role of finance to be a tool at the service of entrepreneurial projects carried out collectively by all parties? Responsible financial actors—for example, ethical finance, participatory finance (or crowdfunding) and solidarity finance—even if they are not numerous enough, demonstrate that an alternative exists. This type of finance has integrated citizen participation for a long time and offers sustainability prospects to the financial sector. In this chapter, we will show that this citizen-based approach could provide a basis for the financing of SDGs.
... Brennan develops a CAPM model with tax implications, considering that in practice, dividends are received at different rates for different risky assets and that the tax rates for investors with different dividends are different [4]. Black creatively proposed the zero-β CAPM model which replaced the risk-free rate of return with the zero-β rate of return [5]. Merton proposed the continuous time series intertemporal ICAPM model, which states that in addition to being influenced by systematic risk in the market, special factors such as inflation and interest rates can also affect the return of assets. ...
Chinese Baijiu industry has always been a popular investment choice. Since 2020, the scale of COVID-19 has been further expanded, followed by a gradual increase in the risk, therefore, calculation and analysis of the risk in Chinese Baijiu industry has become a priority. In this paper, the CAPM model is utilized for empirical research. Taking the 3-year interest rate of national debt as the risk-free interest rate, the opening and closing prices of Kweichow Maotai Co., Ltd, Shanxi Fenjiu Co., Ltd and Kouzijiao Co., Ltd, and Shanghai composite index and Shenwan Baijiu Industry Index from 2019 to 2022 are selected to calculate β, and the risk degree is determined according to the β range. According to the analysis, during the three-year pandemic, the expected rate of return of investment in the Chinese Baijiu industry is higher than the average market rate of return, and the risk level of Chinese Baijiu industry is higher than the risk of the entire market portfolio. In addition, the overall systematic risk of Chinese Baijiu industry is low. The research offers a guideline for investors in the A-share market to understand the real situation of companies in the Baijiu industry in all aspects and provide scientific value guidance for investors who prefer to make equity.
We test the role of dividends and investor sentiment in the relation between idiosyncratic risk and expected returns because Pastor and Veronesi (J Financ 58:1749–1789, 2003) find evidence that dividends reduce firm-specific uncertainty by sending information to the market participants through dividends. Also, Baker and Wurgler (J Financ 61:1645–1680, 2006) document that the negative relation between idiosyncratic risk and expected return only exists under the optimistic sentiment. We first document that the negative relation between idiosyncratic risk and expected return is more concentrated for stocks without dividends than stocks with dividends. We further find that the role of dividends in the relation between idiosyncratic risk and expected return is not affected by investor sentiment. These findings are robust to weighing schemes of returns and firm characteristics such as beta, size, book-to-market ratio, momentum, and liquidity.
Purpose
Financial asset return series usually exhibit nonnormal characteristics such as high peaks, heavy tails and asymmetry. Traditional risk measures like standard deviation or variance are inadequate for nonnormal distributions. Value at Risk (VaR) is consistent with people's psychological perception of risk. The asymmetric Laplace distribution (ALD) captures the heavy-tailed and biased features of the distribution. VaR is therefore used as a risk measure to explore the problem of VaR-based asset pricing. Assuming returns obey ALD, the study explores the impact of high peaks, heavy tails and asymmetric features of financial asset return data on asset pricing.
Design/methodology/approach
A VaR-based capital asset pricing model (CAPM) was constructed under the ALD that follows the logic of the classical CAPM and derive the corresponding VaR-β coefficients under ALD.
Findings
ALD-based VaR exhibits a minor tail risk than VaR under normal distribution as the mean increases. The theoretical derivation yields a more complex capital asset pricing formula involving β coefficients compared to the traditional CAPM.The empirical analysis shows that the CAPM under ALD can reflect the β-return relationship, and the results are robust. Finally, comparing the two CAPMs reveals that the β coefficients derived in this paper are smaller than those in the traditional CAPM in 69–80% of cases.
Originality/value
The paper uses VaR as a risk measure for financial time series data following ALD to explore asset pricing problems. The findings complement existing literature on the effects of high peaks, heavy tails and asymmetry on asset pricing, providing valuable insights for investors, policymakers and regulators.
We implement a new framework to mitigate the errors-in-variables (EIV) problem in the estimation of asset pricing models. Considering an international data of portfolio stock returns from 1990 to 2021 widely used in empirical studies, we highlight the importance of the estimation method in time-series regressions. We compare the traditional ordinary-least squares (OLS) method to an alternative estimator based on a compact genetic algorithm (CGA) in the case of the CAPM. Based on intercepts, betas, adjusted R2, and the Gibbons et al. (1989) test, we find that the CGA-based method outperforms overall the OLS method. In particular, we obtain less statistically significant intercepts, smoother R2 across different portfolios, and lower GRS test statistics.Specifically, in line with Roll’s critique (1977) on the unobservability of the market portfolio, we reduce the attenuation bias in market risk premium estimates. Moreover, our results are robust to alternative methods such as instrumental variables estimated with generalized-method of moments (GMM). Our findings have several empirical and managerial implications related to the estimation of asset pricing models as well as their interpretation as a popular tool in terms of corporate financial decision-making.KeywordsAsset pricingCAPMMarket portfolioTime-series regressionsOrdinary-least squares (OLS)Errors-in-variables (EIV)GMM with instrumental variablesCompact genetic algorithms (CGAs)
El libro Gestión moderna de portafolios: una guía cuantitativa con aplicaciones en R y Python presenta los principales desarrollos la teoría moderna de portafolio (TMP), los cuales han permitido consolidar este campo de investigación como uno de los más desarrollados de la ciencia financiera por sus contribuciones al impulso y profundización del mercado de capitales. Para ello, se abordan inicialmente los elementos fundamentales del modelo media-varianza (MV) introducido por Markowitz en 1952, así como sus extensiones mediante la incorporación de otras medidas de riesgo o de diferentes formulaciones del problema de optimización de portafolio. En este sentido, el libro incorpora, a nivel teórico y aplicado, las principales contribuciones de la TMP durante los últimos 70 años.
After defining the cost of equity in ► Chap. 11, this chapter covers the estimation of the cost of equity using the capital asset pricing model (CAPM). This model, despite its popularity, has practical limitations. Overall, estimating the cost of equity can be considered complex due to several reasons that are presented and discussed in this chapter.
We provide evidence that investors with leverage constraints demand leverage for the sake of leverage. We study the equity closed-end fund (CEF) market and document a strong positive relation between fund leverage and CEF premiums, indicating that investors pay a relative premium for leverage. We perform a quasi-natural experiment and identify leverage as a causal driver of the premium. Leverage changes do not signal improved fund performance. Instead, the only benefit to investors of increased leverage is amplified exposure via greater volatility and risk exposure. We supply external validity by relating our results to the betting-against-beta factor. (JEL G12, G14, G32)
Received December 5, 2021; editorial decision February 7, 2023 by Editor Jeffrey Pontiff. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
We examine whether estimates of hedge fund performance reported in prior empirical research are affected by publication bias. Using a sample of 1019 intercept terms from regressions of hedge fund returns on risk factors (the “alphas”) collected from 74 studies published between 2001 and 2021, we show that the selective publication of empirical results does not significantly contaminate inferences about hedge fund returns. Most of our monthly alpha estimates adjusted for the (small) bias fall within a relatively narrow range of 30–40 basis points, indicating positive abnormal returns of hedge funds: Hedge funds generate money for investors. Studies that explicitly control for potential biases in the underlying data (e.g., backfilling and survivorship biases) report lower but still positive alphas. Our results demonstrate that despite the prevalence of publication selection bias in many other research settings, publication may not be selective when there is no strong a priori theoretical prediction about the sign of the estimated coefficients.
Systematic risk is one of the well-known indices involved in the market situation study. One of the disadvantages of scientific studies of market indices is the lack of involving extreme changes such as embargos and other crises in the model. The present paper attempts to study the impact of the embargo on systematic risk using wavelets as a mathematical-statistical tool. The proposed mathematical model was applied to the case of the Golf Council Countries (GCC) market, with the Qatar case as an example of an embargoed country. The time series applied corresponds to the Qatar stock exchange index active trade over the period January 01, 2017, to December 31, 2021, which was characterized by the main GCC embargo period against Qatar. The findings in the present work permit understanding the impact of such a crisis on the market and allow a good description of the behavior of the market during the embargo, which makes a good basis for managers, policymakers, and investors.
The purpose of this paper is to establish and estimate the extent of the volatility anomaly (VA). We examine the impact of the beta, variance, relative-beta, and relative-variance measures on the stock returns for NIFTY500 companies, for the 10-year period 2010-2020. Our empirical findings suggest that the VA is predominant in the medium to long-term, but seems to be negligible in the ultra-short and short time frames. The overall findings suggest that the VA is most significant when the time period considered is three years or more. These results can be highly useful for investors as well as portfolio managers.
Subject. This article focuses on the consideration of the algorithm and methodological approaches to assessing the cost of capital. Objectives. The article aims to develop a practical algorithm for assessing the cost of capital and calculating the discount rate based on ruble risk-free assets and Russian financial statistics. Methods. For the study, we used the Weighted Average Capital Cost (WACC) and Capital Asset Pricing (CAPM) models. Results. The article offers a tested step-by-step algorithm for calculating the cost of capital and risk premium loading to it using domestic financial statistics. It also justifies the need to take non-systematic risks out and beyond the weighted average capital cost and offers a deterministic mechanism for their assessment. Conclusions and Relevance. The author-developed algorithm for estimating the cost of capital, as well as methodological recommendations for its use, can be used by domestic investors to make the necessary decisions, as well as by the financial services of Russian companies to build the economic policy of the company. Using the proposed approach may help obtain a more adequate assessment of the cost of capital of Russian companies for domestic investors, thereby improving their competitiveness.
This paper presents an empirical analysis of the capital asset pricing model using trading data for the Chinese A-share market from 2000 to 2019. Firstly, the standard CAPM is tested using a Fama-MacBetch regression and although the results successfully test the three core hypotheses, the resulting beta risk does not have a significant impact on returns. Secondly, the Fama-French three-factor model, which uses a combination of market, size and value factors to price capital assets, is analysed, showing that it is able to capture most of the variation in A-share market returns, with an adjusted R-squared greater than 0.88 for the 25 portfolios constructed. Finally, the paper takes into account the "shell value contamination" problem caused by IPO regulation in the Chinese stock market, and minimises its impact by excluding stocks in the lowest 30% of the market capitalisation, which allows some of the anomalous results in the three-factor model to be effectively corrected. Although this paper does not present a more innovative approach, it is unique in its data selection and presents a detailed presentation of the data processing and regression analysis process, which 1) illustrates the applicability of capital asset pricing models in the Chinese market; and 2) provides a set of open source materials for the basic learning of capital asset pricing models.
This study investigates the effect of firm-specific news on the pricing of idiosyncratic volatility (IVOL) in China. Using a sample of non-financial A-share listed firms from January 2006 to June 2018, we find that the predictive ability of IVOL is much weaker around firm announcements compared to that without news, suggesting that the limited arbitrage cannot disentangle the IVOL puzzle completely in the emerging market. Additionally, we investigate the effect of news sentiment on the predictive ability of IVOL and find that it is much stronger following bad news compared to good news. Finally, when we include the macroeconomic variables known to predict returns to adjust the systematic risk, we obtain novel findings that the negative premium of IVOL becomes insignificant, suggesting that the negative premium is time-varying with macroeconomy.
This article addresses the topic of nonlinear dependencies in the Fama and French three-factor model. Five time-series models, including nonlinear terms, are assessed using US and European data and compared with a benchmark linear model. The analysis found that nonlinear dependencies in the modified Fama and French three-factor model were statistically significant and provided additional explanatory power for the underlying return-generating process. However, these nonlinear dependencies are of secondary importance in the economic sense.
The capital asset pricing model has been object of violent theoretical and empirical criticism in the mainstream financial literature. This chapter overviews the main controversies, presents the most innovative alternatives, and explains why the model, despite its shortcomings, remains the backbone of finance literature and financial practice.KeywordsAsset pricingFama-French factorsFactor investingFactor zoocost of capitalcost of equity
The primary purpose of this paper is to explore the herding behavior in the Chinese stock market during COVID-19 and the asymmetry of that behavior using the daily returns of A- and B-shares from 2 January 2019, to 15 October 2021. The study uses the cross-sectional absolute deviation model to analyze stock market herding behavior by non-linear polynomial regression. We show that the herding behavior in the Chinese stock market is more prominent during the COVID-19 pandemic. Herding behavior has a negative effect on stock market volatility. Moreover, such a suppressing effect weakened during the COVID-19 pandemic. There is an asymmetry in herding behavior during the bull and bear markets, which is helpful in our investigation of the market’s volatility during the COVID-19 pandemic. The pronounced asymmetry in the herding behavior of the Chinese stock market during COVID-19 is assessed using the E-GARCH (p, q) model. The empirical results of the present study contribute to the literature about herding asymmetry by showing the herding behavior during the health crisis and bull and bear markets. It also helps reconcile the debate about the impact of herding on market stability and provides insightful guidance for investors wishing to invest in the Chinese stock market.
In his annual letter to the CEOs of companies in which Blackrock is a shareholder, and beyond, Larry Fink highlights the climate and carbon target as the centerpiece of the strategy of Blackrock, the world’s largest asset manager. It has now become a habit for one of the world’s most powerful financiers to highlight this objective in its annual communication. It is the foundation of a committed shareholder strategy that should contribute to the achievement of the objectives defined by the Paris Agreement (2015) in terms of global warming (maximum +1.5°C by 2100), and more generally the achievement of the Sustainable Development Goals (SDGs) as part of the Agenda 2030.
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