Testing the Validity of the Capital Asset Pricing Model (CAPM) in the Spanish, French and Portuguese Stock Markets in the Period 2019-2022: An Analysis of Its Performance in Normal and Abnormal Market Conditions
Romero Rincon, Noelia (2023)
Romero Rincon, Noelia
2023
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Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:amk-2023052212695
https://urn.fi/URN:NBN:fi:amk-2023052212695
Tiivistelmä
This bachelor’s thesis examines the performance of the Capital Asset Pricing Model (CAPM) under both normal and abnormal market conditions.
The overall objective of the study was to determine the validity of the CAPM under both normal and abnormal market conditions by comparing the returns of high and low beta stocks in three market indices across a four-year period. The underlying objective was thus to provide investors with information on the validity of this model to value investments in different stock markets.
The thesis includes a theory section and an empirical section that tests the validity of the model using stock market data. The theory section describes the CAPM’s origins, assumptions and equation, as well as the controversy regarding its validity by exploring academic research that tested the model across different markets, time periods and market conditions. The empirical part contributes to this research by performing statistical analysis to test the validity of the CAPM for a time period and economic events for which there is a research gap at present.
The study involved quantitative methods. Daily, weekly and monthly stock and stock market index returns for 2019-2022 were collected to calculate their average logarithmic returns, which were then used to calculate the stocks’ beta coefficients using linear regression analysis. The stocks with statistically significant beta values were divided into high and low beta stock groups, and the mean returns for both groups across all periods and frequencies were analyzed by performing two-sample one tail t-tests assuming unequal variances.
The results of the t-tests were unable to reject the null hypotheses and indicated that the returns of high beta stocks were not larger than those of low beta stocks. In practice, an inverted relationship was observed in several cases. Ultimately, these results indicate that the CAPM is not an effective model to value investments in these stock markets during the periods investigated.
The overall objective of the study was to determine the validity of the CAPM under both normal and abnormal market conditions by comparing the returns of high and low beta stocks in three market indices across a four-year period. The underlying objective was thus to provide investors with information on the validity of this model to value investments in different stock markets.
The thesis includes a theory section and an empirical section that tests the validity of the model using stock market data. The theory section describes the CAPM’s origins, assumptions and equation, as well as the controversy regarding its validity by exploring academic research that tested the model across different markets, time periods and market conditions. The empirical part contributes to this research by performing statistical analysis to test the validity of the CAPM for a time period and economic events for which there is a research gap at present.
The study involved quantitative methods. Daily, weekly and monthly stock and stock market index returns for 2019-2022 were collected to calculate their average logarithmic returns, which were then used to calculate the stocks’ beta coefficients using linear regression analysis. The stocks with statistically significant beta values were divided into high and low beta stock groups, and the mean returns for both groups across all periods and frequencies were analyzed by performing two-sample one tail t-tests assuming unequal variances.
The results of the t-tests were unable to reject the null hypotheses and indicated that the returns of high beta stocks were not larger than those of low beta stocks. In practice, an inverted relationship was observed in several cases. Ultimately, these results indicate that the CAPM is not an effective model to value investments in these stock markets during the periods investigated.