How to Explain Market Beta in CAPM?

How to Explain Market Beta in CAPM?

Nguyen Cao Anh

University of Nguyen Tat Thanh
ncanh@ntt.edu.vn

Thai Hong Thuy Khanh

University of Nguyen Tat Thanh
thtkhanh@ntt.edu.vn

 Abstract

The explanation of market beta in the CAPMs causes mispricing on percentage flat for capital asset pricing because of real-weight absence or real-cashflow absence, therefore this research provides a new methodology of econometrics to explain two coefficients of alpha and beta in a structural financial model of capital asset pricing to support the analysis of expected market return and market risk on abnormal market transaction. The model uses the daily data of Dow Jones Industrial (DJI) to explain the market beta on the new perspective of market transaction under no consideration of regulatory interest rate of central bank. And the research results are shown that there are three market peaks of DJI in May-1999, Feb-2020, and Jan-2022 because the speculative effect is stronger than the equity ownership; there is a remaining market peak of DJI in Oct-2007 because of the uncontrollability of stock supply on abnormal market transaction.

Keywords. Expected Market Return, Market Beta, Market Cycle, Market Risk, Ordinary Least Squares.

References

  1. Aharoni, G., Grundy, B., & Zeng, Q. (2013). Stock Returns and the Miller Modigliani Valuation Formula: Revisiting the Fama French Analysis, Journal of Financial Economics, 110(2), 347-357. Doi: 10.1016/j.jfineco.2013.08.003
  2. Alexander, G.J. (2009). From Markowitz to Modern Risk Management, European Journal of Finance, 15(5-6), 451-461. Doi: 10.1080/13518470902853566
  3. Antoniou, C., Doukas, J.A., & Subrahmanyam, A. (2016). Investor Sentiment, Beta, and the Cost of Equity Capital, Management Science, 62(2), 347-367. Doi: 10.1287/mnsc.2014.2101
  4. Apergis, N., & Rehman, M.U. (2018). Is CAPM a Behavioral Model? Estimating Sentiments from Rationalism, Journal of Behavioral Finance, 19(4), 442-449. Doi: 10.1080/15427560.2018.1431885
  5. Baker, M., & Wurgler, J. (2007). Investor Sentiment in the Stock Market, Journal of Economic Perspectives, 21(2), 129-151. Doi: 10.1257/jep.21.2.129
  6. Black, F., Jensen, M., & Scholes, M. (1972). The Capital Asset Pricing Model: Some Empirical Tests, in Jensen, M.C. (Ed.): Studies in the Theory of Capital Markets, 79-124, Praeger Publisher Inc., New York. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=908569
  7. Brealey, R.A., Myers, S.C., Allen, F., & Edmans, A. (2023). Principles of Corporate Finance, 14th ed., McGraw-Hill, New York.
  8. Doukas, J.A., & Han, X. (2021). Sentiment‐Scaled CAPM and Market Mispricing, European Financial Management, 27(2), 208-243. Doi: 10.1111/eufm.12306
  9. Dowd, K. (2007). Measuring Market Risk, John Wiley & Sons Ltd., England
  10. Fama, E.F. (1965). The Behavior of Stock-Market Prices, Journal of Business, 38(1), 34-105. Doi: 10.2307/2350752
  11. Fama, E.F. (1968). Risk, Return and Equilibrium: Some Clarifying Comments, Journal of Finance, 23(1), 29-40. Doi: 10.1111/j.1540-6261.1968.tb02996.x
  12. Fama, E.F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work, Journal of Finance, 25(2), 383-417. Doi: 10.2307/2325486
  13. Fama, E.F., & French, K.R. (1992). The Cross Section of Expected Return, Journal of Finance, 47(2), 427-465. Doi: 10.1111/j.1540-6261.1992.tb04398.x
  14. Fama, E.F., & French, K.R. (1993). Common Risk Factors in the Returns on Stocks and Bonds, Journal of Financial Economics, 33(1), 3-56. Doi: 10.1016/0304-405x(93)90023-5
  15. Fama, E.F., & French, K.R. (1995). Size and Book-to-Market Factors in Earnings and Returns, Journal of Finance, 50(1), 131-155. Doi: 10.1111/j.1540-6261.1995.tb05169.x
  16. Fama, E.F., & French, K.R. (1996). Multifactor Explanations of Asset Pricing Anomalies, Journal of Finance, 51(1), 55-84. Doi: 10.1111/j.1540-6261.1996.tb05202.x
  17. Fama, E.F., & French, K.R. (2006). Profitability, Investment and Average Returns, Journal of Financial Economics, 82(3), 491-518. Doi: 10.1016/j.jfineco.2005.09.009
  18. Fama, E.F., & French, K.R. (2015). A Five-Factor Asset Pricing Model, Journal of Financial Economics, 116(1), 1-22. Doi: 10.1016/j.jfineco.2014.10.010
  19. Fernandez, V. (2006). The CAPM and Value at Risk at Different Time-Scales, International Review of Financial Analysis, 15(3), 203-219. Doi: 10.1016/j.irfa.2005.02.004
  20. Hull, J. (2015). Risk Management and Financial Institutions, Fourth Edition, John Wiley & Sons Inc., United States of America
  21. Lintner, J. (1965). The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets, Review of Economics and Statistics, 47(1), 13-37. Doi: 10.2307/1924119
  22. Markowitz, H. (1952). Portfolio Selection, Journal of Finance, 7(1), 77-91. Doi: 10.2307/2975974
  23. Miller, M.H., & Modigliani, F. (1961). Dividend Policy, Growth, and the Valuation of Shares, Journal of Business, 34(4), 411-433. Doi: 10.2307/2351143
  24. Novy-Marx, R. (2013). The Other Side of Value: The Gross Profitability Premium, Journal of Financial Economics, 108(1), 1-28. Doi: 10.1016/j.jfineco.2013.01.003
  25. Reilly, F.K., & Brown, K.C. (2012). Investment Analysis and Portfolio Management, Tenth Edition, CENGAGE Learning, United States of America.
  26. Sarykalin, S., Serraino, G., & Uryasev, S. (2008). Value-at-Risk vs. Conditional Value-at-Risk in Risk Management and Optimization, INFORMS, ISBN 978-1-877640-23-0, 270-294. Doi: 10.1287/educ.1080.0052
  27. Sharpe, W.F. (1964). Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk, Journal of Finance, 19(3), 425-442. Doi: 10.1111/j.1540-6261.1964.tb02865.x

./.

Call Now