Empirical testing of the CAPM on the JSE

Abstract

Fama's (1970) efficient market hypothesis (EMH) and the capital asset pricing model (CAPM), jointly ascribed to Markowitz (1952), Treynor (1961), Sharpe (1964), Lintner (1965) and Moss in (1966, remain the foundation of most finance and investment courses. This is surprising, given the sustained criticism of the model and its assumptions, and is a reflection of the elegance and parsimony of the theory over the empirical evidence.On the Johannesburg Stock Exchange (JSE), several authors have examined and noted significant inadequacies relating to the single factor CAPM, particularly with regard to the dual nature (resources versus industrial shares) which characterise this bourse. Van Rensburg and Slaney (1997) advocate the use of a two factor arbitrage pricing theory (APT) model, but show that (at least for industrial shares), additional parameters are required (Van Rensburg, 2001 ).We revisit this ground using an improved methodology and data set over the period 31 December 1986 to 31 December 2011. We find that portfolios constructed on the basis of ranked beta exhibit a monotonic, inverse relationship to what the CAPM prescribes for most of the time-series. The use of the single beta CAPM is therefore inappropriate.

A Comparative Study On The Effects Of Market Crisis And Recessions On The Performance Of Defensive Sectors

“…Furthermore, the five largest companies on the exchange make up approximately 40% of the index. Ward and Muller (2012) found that companies falling outside the ALSI are usually considered to be too small, and therefore too illiquid for most investors, which resulted in their exclusion from the index. Strugnell, Gilbert, and Kruger (2011) showed that a number of other share characteristics (i.e., anomalies) such as the size effect and price-earnings are correlated to betas.…”

“…Strugnell, Gilbert, and Kruger (2011) showed that a number of other share characteristics (i.e., anomalies) such as the size effect and price-earnings are correlated to betas. It was then established by Ward and Muller (2012) that small cap sectors have lower betas than their large and mid cap counterparts. Furthermore, it was discovered that low betas also relate to issues around liquidity, rendering concentration and liquidity constraints to be the two main factors associated with the observation of low betas.…”

Value and size investment strategies during the global financial crisis: evidence from the South African equity market

“…The inclusion of the appropriate dividend component in the monthly total return calculation is achieved by spreading the periodic dividends across the full calendar year (as applied in Liew & Vassalou, 2000;Mutooni & Muller, 2007; some South African studies, such as Graham & Uliana, 2001, ignore dividends entirely). Transaction costs are not taken into account for two reasons: firstly, they arise almost entirely on an annual basis (as part of the annual portfolio rebalancing process), and secondly, they are approximately equal across all portfolios (points made, for example, by Ward & Muller, 2012). Therefore, for the purposes of this study transaction costs are immaterial, both in absolute amount and in terms of relative inter-portfolio differences.…”

Global Risk Factors and South African Equity Indices

“…The findings of Van Rensburg and Robertson (), Strugnell et al . (), Ward and Muller () and Thomson and Reddy () all show that the standard version of the CAPM must be rejected for the SA market. Several researchers have considered Fama–French‐styled models for the SA market (see Auret and Cline, for an overview) while others have looked at an APT model that reconstructs SA indices from the underlying equity sectors (Kruger and Van Rensburg, ; Flint et al ., ).…”