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Evaluation of the Capital Asset Pricing Model (CAPM) Using Chinese Stock Market Data

Dissertation

Finance & Accounting

Pages 42 (10542 words)

The 1973 Fama and MacBeth approach to the empirical testing of the CAPM principles with the 1995 slight modification by Pettengill et al. has been applied in the Chinese stock market case study. …

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## Introduction

23). It is worth noting that numerous empirical studies that have conducted in line with evaluating the model have proved to be in harmony with the CAPM principles; nonetheless, some of the similar evaluations have contradicted the model. Therefore, this paper aims at studying if the CAPM principles hold for the China Stock Exchange. Among other things to be included in the analysis, include: i. Whether higher beta results to higher expected returns ii. Whether the zero or average intercept is equal to risk free rate and the SML slope is equal to the average risk premium iii. Whether there is an existence of linearity between the expected returns and the stock beta. The monthly stock returns of some of the firms listed in the Chinese Stock Exchange are used in the analysis. The data was obtained from January 2009 to December 2012; hence, the analysis targets a period of four years. To test the CAPM principles in this stock market, the study will employ the use of approach methods contributed for by Black, Jensen, and Scholes as per the year 1972; described as the time series test. Additionally, the study shall employ the use of the 1973 Fama and MacBeth cross sectional test. From the analysis of the Chinese Stock exchange data for the period of four year in line with the above methods, it is apparent that this duty did not hold up fully with the CAPM principles. ...

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