The conditional relation between beta and returns in the Hong Kong stock market

Abstract

Published results of empirical tests over the past two decades indicate that the risk-return relation in the Hong Kong stock market is negative. Such findings refute the positive risk-returnrelation stipulatedinthe traditional CAPM. However, traditional CAPM invokes expected or ex-ante returns while empirical tests have used ex-post returns as an imperfect proxy. Thus, in this paper, the risk-return relationship in the Hong Kong stock market is examined using the conditional method based on the work of Pettengill et al., which takes into consideration the dominating ex-post negative excess market returns found in the Hong Kong stock market. Under the conditional Pettengill et al. method, test results demonstrate a strong conditional positive and negative risk-return relationships in the Hong Kong stock market. The results show that the estimated risk premiums in both up and down markets are insignificantly different from the corresponding expected risk premiums. But the estimated risk premiums of the up and the down markets are asymmetric with the magnitude of the down market premium greater than that of the up market. Thus, under the conditional CAPM, the estimated security market line (SML) in the down market is negatively steeper than is the positively sloped estimated SML in the up market. The significant results are not driven by abnormal return behaviour in some of the months or by a particular beta group. Thus, in general, the test results suggest that the conditional CAPM is still practically a useful equilibrium pricing model in the Hong Kong stock market.

On the validity of the augmented Fama and French’s (1993) model: evidence from the Hong Kong stock market

“…Their evidence shows a positive (negative) relationship between beta and realized returns during periods of positive (negative) excess market returns. Following Pettengill et al (1995), Lam (2001) provides supportive evidence of a strong relationship between beta and return during both up-and down-markets in the Hong Kong stock market. In order to check the robustness of the four-factor model, we examine the model under such conditional framework.…”

“…In order to check the robustness of the four-factor model, we examine the model under such conditional framework. Following Pettengill et al (1995) and Lam (2001), if the realized market excess return is positive (negative), it is classified as up-market (downmarket). The sampling period is then split into up-and down-market periods.…”

Security returns, beta, size, and book-to-market equity: evidence from the Shanghai A-share market

“…The expectation is that the market risk premium will always be positive, 1 Subsequent studies based in the US market by Grinold (1993), Davis (1994) and French (1995, 1996) provide additional evidence against an unconditional relationship between beta and returns. 2 Studies outside of the US and European markets include; Ho et al (2000) and Lam (2001) in the Hong Kong market, Faff (2001) in the Australian market, and Sandoval and Saens (2004) examining the markets of Argentina, Brazil, Chile and Mexico. All these studies fail to find an unconditional relationship between beta and returns.…”

Conditional risk–return relationship in a time-varying beta model

“…1 Many studies apply the PSM methodology to other markets. These include: Fletcher (1997Fletcher ( , 2000 and Hung et al (2004) for the UK market; Isakov (1999) for the Swiss market; Lam (2001) and Ho et al (2006) for the Hong Kong market; Elsas et al (2003) for the German market; Hodoshima et al (2000) for the Japanese market; Faff (2001) for the Australian market; and Sandoval and Saens (2004) for four Latin American markets. The overwhelming preponderance of these studies supports the PSM conclusion.…”