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Validating the Capital Asset Pricing Model at Irish Stock Exchange

Saporito, Federica (2017) Validating the Capital Asset Pricing Model at Irish Stock Exchange. Masters thesis, Dublin, National College of Ireland.

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Abstract

The Capital Asset Pricing Model (CAPM) is one of the most popular application in finance since its development in the late ‘60s; it assumes that only one factor, the systematic risk, identified by the Greek letter beta, influences the required return on assets and that the relationship is positive and linear. Nowadays, it is still a discussed area in academic literature, especially for its idealistic assumptions, which are rejected by several empirical tests.

This study investigates the efficiency and the validity of the Capital Asset Pricing Model, at Irish Stock Exchange (ISE), for a sample of 25 companies, selected from the ISE database, during the period 2001-2011, which has been divided into three sub-periods, in order to examine the model pre, during and after the global financial crisis which occurred in 2007-2008.

The companies are then grouped in 110 semi-annually portfolios, of 5 stocks each, in descending order of beta. The methodology pursued, with the aim to clarify the linearity and positivity of the risk-return relationship, consists of a linear regression followed by a t-test of the intercept which showed a rejection of the model in all the three sub-periods, as the intercept was non-zero. However, despite the statistically non-significance of the CAPM, it emerged that during the crisis the co-movement risk-return is more evident and positive than in the other sub-periods (pre and postcrisis). Hence, the results suggest that there is more than one factor which explains the asset returns, and that the Capital Asset Pricing Model, itself is not a valid model in helping to predict the asset prices at Irish Stock Exchange.

The outcome of the study can be seen as a stimulus for further researches in this field, given the poor academic attention at the Capital Asset Pricing Model, in the Irish context and during the global financial crisis.

Item Type: Thesis (Masters)
Subjects: H Social Sciences > HC Economic History and Conditions > Economic Recession
H Social Sciences > HG Finance > Investment
H Social Sciences > HG Finance > Investment > Stock Exchange > Irish Stock Exchange
Divisions: School of Business > Master of Science in Finance
Depositing User: CAOIMHE NI MHAICIN
Date Deposited: 22 Nov 2017 10:15
Last Modified: 22 Nov 2017 10:15
URI: http://trap.ncirl.ie/id/eprint/2887

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