Conditional CAPM

and the Arbitrage Pricing Theory (APT) in predicting stock return in manufacturing companies listed on the Indonesia Stock Exchange (BEI) for the period 2015 -2018. CAPM is a model of the relationship between risk and expected return of a security or portfolio. It can be used to determine the price of a risky asset, whereas APT is an approach in determining the price of an asset that is not only based on one variable, but many variables. The variables used in this study consist of market risk premium, inflation, exchange rates (Rp / USD), interest rates, and stock returns. The method used in sampling is purposive sampling. Based on the method, 20 samples of companies with certain criteria were obtained. Absolute Deviation (MAD) value on the CAPM model has a value of 0.1096 and the APT model has a value of 0.3631. The smaller the value of Mean Absolute Deviation (MAD), it indicates that the regression model is more precise or accurate in predicting the dependent variable, namely stock returns. The results of data analysis show that the CAPM model is more precise or accurate than the APT model in predicting stock returns.

We propose a volatility-based threshold capital asset pricing model (V-CAPM) in which asset betas change discretely with respect to innovations in aggregate volatility. Using option-implied measures (i.e. returns on at-the-money straddles written on the S&P 500 index and range of the VIX index) as proxies for changes in aggregate volatility, we find that asset sensitivity to market risk changes significantly when aggregate market volatility is beyond a certain threshold. More specifically, portfolios of small (big) and value (growth) stocks have significantly higher (lower) betas at times of high volatility. Due to changes in their market betas, small and value stocks are perceived riskier than their big and growth counterparts in bad times, when aggregate volatility is high. The proposed model also does a better job with pricing, especially for value and small portfolios and when aggregate market volatility is high.

We introduce a methodology which deals with possibly integrated variables in the specification of the betas of conditional asset pricing models. In such a case, any model which is directly derived by a polynomial approximation of the functional form of the conditional beta will inherit a nonstationary right hand side. Our approach uses the cointegrating relationships between the integrated variables in order to maintain the stationarity of the right hand side of the estimated model, thus, avoiding the issues that arise in the case of an unbalanced regression. We present an example where our methodology is applied to the returns of funds-of-funds which are based on the Morningstar mutual fund ranking system. The results provide evidence that the residuals of possible cointegrating relationships between integrated variables in the specification of the conditional betas may reveal significant information concerning the dynamics of the betas.

Objective - A previous study conducted by the same authors found that the conditions of market overreaction occurred in Indonesia and the market factor in CAPM, or a single beta, is able to explain the portfolio returns. As a continuation of that study, we now use the concept of conditional CAPM, or a dual beta, to test whether the performance of the dual beta can outperform the single beta. Methodology/Technique - The research uses the stocks of non-financial sector company on the Indonesian Stock Exchange during the period between July 2005 and December 2015, which have been divided into two portfolios; the winner and the loser. The conditional CAPM is applied by separating the market into upstream markets and downstream markets, so the dual beta model can be formulated. Findings - The results are consistent with the findings of Pettengill et al. (1995). The results of a single beta test do not comply with the conditions required in the CAPM model and this can be corrected through...

The formulation of the problem in this study was how the accuracy of the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) in Determining the Choice of Investing in the Jakarta Islamic Index (JII). The objective of this study was to find out the differences of the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) in Determining the Choice of Investing in the Jakarta Islamic Index (JII). There were two balance methods that are still used as the approach material for accuracy in predicting expected return. The two models were the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT). In predicting CAPM company stock returns using risk-free return asset factors, market returns and beta while APT uses macroeconomic factors, namely interest rates, inflation, exchange rates and the money supply. The population in this study was 68 company shares after passing the purposive sampling stage, the sample of this study consisted of 27 mont...

In doing investment, an investor certainly avoids risk; thus, the investor needs a model in making predictions to forecast the return of shares. There are two models to predict this: Capital Asset Pricing Capital (CAPM) and Arbitrage Pricing Theory (APT). The purpose of this study is to find out which models are more accurate in determining investment options, especially during the Covid-19 pandemic in companies that are included in the LQ 45 Index group. The population in this study is 50 companies listed in LQ 45 from February 2020 - July 2021. The sampling technique used in this study is purposive sampling. The data used in this study will be processed through Ms.Excel and SPSS Version 21. The data analysis techniques used in this study are the Basic Assumption Test consisting of Normality Test and Homogeneity Test, Mean Absolute Deviation (MAD), and hypothesis testing consisting of independent t-test samples. The results in this study show that Model is accurate in predicting st...

Para investor dalam pembelian saham pada dasarnya memiliki tujuan yang sama yaitu mengharapkan pengembalian (return) yang maksimal dan risiko seminimal mungkin. Untuk mengambil keputusan dalam investasi tersebut dengan memperhatikan harapan investor maka diperlukan prediksi yang akurat. Untuk memilih saham dari Pasar Modal, investor menilai dari expected return yang dihitung dari saham tersebut. Para investor dalam memilih portofolio saham sering dihadapkan dengan berbagai faktor yang relevan dalam mengestimasi expected return. Model yang sering digunakan dalam mengestimasi expected return saham berdasarkan faktor-faktor yang dianggap memengaruhi return saham adalah Capital Asset Pricing Model (CAPM) dan Arbitrage Pricing Theory (APT). CAPM merupakan model untuk menentukan expected return saham pada keadaan equilibrium. APT mengasumsikan bahwa expected return saham dipengaruhi oleh berbagai faktor dalam perekonomian dan industri. Tujuan penelitian ini untuk mengetahui perbandingan t...

Objective - A previous study conducted by the same authors found that the conditions of market overreaction occurred in Indonesia and the market factor in CAPM, or a single beta, is able to explain the portfolio returns. As a continuation of that study, we now use the concept of conditional CAPM, or a dual beta, to test whether the performance of the dual beta can outperform the single beta. Methodology/Technique - The research uses the stocks of non-financial sector company on the Indonesian Stock Exchange during the period between July 2005 and December 2015, which have been divided into two portfolios; the winner and the loser. The conditional CAPM is applied by separating the market into upstream markets and downstream markets, so the dual beta model can be formulated. Findings - The results are consistent with the findings of Pettengill et al. (1995). The results of a single beta test do not comply with the conditions required in the CAPM model and this can be corrected through...

Objective - A previous study conducted by the same authors found that the conditions of market overreaction occurred in Indonesia and the market factor in CAPM, or a single beta, is able to explain the portfolio returns. As a continuation of that study, we now use the concept of conditional CAPM, or a dual beta, to test whether the performance of the dual beta can outperform the single beta. Methodology/Technique - The research uses the stocks of non-financial sector company on the Indonesian Stock Exchange during the period between July 2005 and December 2015, which have been divided into two portfolios; the winner and the loser. The conditional CAPM is applied by separating the market into upstream markets and downstream markets, so the dual beta model can be formulated. Findings - The results are consistent with the findings of Pettengill et al. (1995). The results of a single beta test do not comply with the conditions required in the CAPM model and this can be corrected through...

Abstract-The CAPM under the means of the two step regression procedure indicated that the cross section of average excess security return is positively related to beta. Under a frame of Computational Econometrics the two step regression procedure is implemented into ...

We selectively survey, unify and extend the literature on realized volatility of financial asset returns. Rather than focusing exclusively on characterizing the properties of realized volatility, we progress by examining economically interesting functions of realized volatility, namely realized betas for equity portfolios, relating them both to their underlying realized variance and covariance parts and to underlying macroeconomic fundamentals.

The studies on beta variability have been fully documented in the literature with various empirical stances, meaning that a concession has not been reached. In view of this we employ the variable Mean Response Regression Model to investigate the random movement of beta coefficients over time and across market phases, using monthly stock returns from Nigerian Stock Exchange (NSE). Our findings based on this model show that beta coefficients move randomly around a trend line when the market is up-beat, whereas they tend to be less volatile in the down market. However, a long-run equilibrium relationship between the return on the individual security and beta components is evident in the two markets. Based on these findings we recommend that investors should arbitrage between these markets and take advantage of price differentials to earn riskless profit.

A valid and accurate capital asset pricing model (CAPM) may help investors and mutual funds managers in determining expected returns which may lead to increase their profits and community resources. The problem is that the traditional CAPM does not accurately predict the expected rate of return. A more accurate model is needed to help investors in determining the intrinsic price of the financial asset they want to sell or buy. The purpose of this study was to examine the validity of the single-factor CAPM and then develop and test a multifactor CAPM in the Jordanian stock market. The study was informed by the modern portfolio theory and specifically by the single-factor CAPM developed by Sharpe, Lintner, and Mossin. The research questions for the study examined the factors that may explain the variation in the expected rate of return on stocks in the Jordanian stock market and the relationship between the expected rate of return and factors of market return, company size, financial leverage, and operating leverage. A causal-comparative quantitative research design was employed to achieve the purpose of the study by testing the listed companies on the Amman stock exchange (ASE) for the period from 2000 to 2015. Data were collected from the ASE database and analyzed using the multiple regression model and t test. The results revealed that market return, company size, and financial leverage are not predictors of the expected rate of return while operating leverage is a predictor Keywords: capital asset pricing model, Amman stock exchange, financial leverage, operating leverage, size, multi-factor capital asset pricing model To test the single-factor and the proposed model, five hypotheses were developed. The first hypotheses was http://ibr.ccsenet.org

In doing investment, an investor certainly avoids risk; thus, the investor needs a model in making predictions to forecast the return of shares. There are two models to predict this: Capital Asset Pricing Capital (CAPM) and Arbitrage Pricing Theory (APT). The purpose of this study is to find out which models are more accurate in determining investment options, especially during the Covid-19 pandemic in companies that are included in the LQ 45 Index group. The population in this study is 50 companies listed in LQ 45 from February 2020 - July 2021. The sampling technique used in this study is purposive sampling. The data used in this study will be processed through Ms.Excel and SPSS Version 21. The data analysis techniques used in this study are the Basic Assumption Test consisting of Normality Test and Homogeneity Test, Mean Absolute Deviation (MAD), and hypothesis testing consisting of independent t-test samples. The results in this study show that Model is accurate in predicting st...

In this paper, we extend the residual income valuation model by incorporating the long-run sensitivity of earnings to various economic factors. Our valuation procedure integrates the multidimensionality of uncertainty, as well as the long-run concept of risk (recently proposed in finance and accounting). Our extension model begins with an earnings multifactor process, uses an intertemporal equilibrium version of the residual income valuation method, and sums over many periods. In this manner, we demonstrate that the abnormal earnings growth rate of a firm is linearly and positively related to N sensitivity coefficients, given by the long-run sensitivity between abnormal earnings and economic factors. We then reveal that the corresponding equity value of the firm is a function of the current book value, abnormal earnings, and N long-run risk parameters. In the context of the residual income valuation approach, these findings suggest that earnings sensitivity to several factors repres...

In this paper, we extend the residual income valuation model by incorporating the long-run sensitivity of earnings to various economic factors. Our valuation procedure integrates the multidimensionality of uncertainty, as well as the long-run concept of risk (recently proposed in finance and accounting). Our extension model begins with an earnings multifactor process, uses an intertemporal equilibrium version of the residual income valuation method, and sums over many periods. In this manner, we demonstrate that the abnormal earnings growth rate of a firm is linearly and positively related to N sensitivity coefficients, given by the long-run sensitivity between abnormal earnings and economic factors. We then reveal that the corresponding equity value of the firm is a function of the current book value, abnormal earnings, and N long-run risk parameters. In the context of the residual income valuation approach, these findings suggest that earnings sensitivity to several factors repres...

This paper integrates the long-run covariance between aggregate consumption and firm earnings into the stock valuation process. After assuming that firms adjust their dividend payments toward a target dividend payout ratio, we use the intertemporal framework of the consumption capital asset pricing model (CCAPM) to explore the effect of systematic earnings risks on intrinsic stock values. Our main results show that the equilibrium price of a stock is positively related to its long-run earnings growth rate, and negatively related to its earnings-consumption beta, obtained from its long-run covariance between earnings growth and aggregate consumption growth. This suggests that long-run risk measured with earnings affects the theoretical value of a firm. Overall, our work suggests that the long-run concept of risk, using accounting earnings, represents an appropriate parameter for estimating the equity value of a firm.

This paper investigates the theoretical relationship between earnings, risks and dividends, in an intertemporal context. After assuming that firms adjust their dividend payments toward a target dividend payout ratio, we utilize the framework of the consumption capital asset pricing model (CCAPM) to examine the effect of systematic earnings risk on dividend policy. Our main result indicates that the dividend payout ratio of a firm is negatively related to its earnings consumption beta, obtained from the covariance between aggregate consumption and earnings. This result suggests that risk measured with earnings influences dividend policy. This result also suggests that the earnings consumption beta integrates the multiple dimensions of a firm's earnings risk.

The formulation of the problem in this study was how the accuracy of the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) in Determining the Choice of Investing in the Jakarta Islamic Index (JII). The objective of this study was to find out the differences of the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) in Determining the Choice of Investing in the Jakarta Islamic Index (JII). There were two balance methods that are still used as the approach material for accuracy in predicting expected return. The two models were the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT). In predicting CAPM company stock returns using risk-free return asset factors, market returns and beta while APT uses macroeconomic factors, namely interest rates, inflation, exchange rates and the money supply. The population in this study was 68 company shares after passing the purposive sampling stage, the sample of this study consisted of 27 monthly company shares that were registered continuously in the period 2010-2017. The data used in this study were secondary data with the data collection technique was documentation. The analysis technique used is independent sample t-test. The results of this study indicate that the CAPM method is more accurate than APT in determining the choice of investing in JII shares and there was no significant difference in accuracy between the CAPM and APT methods in determining the choice of investing in JII shares.

The formulation of the problem in this study was how the accuracy of the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) in Determining the Choice of Investing in the Jakarta Islamic Index (JII). The objective of this study was to find out the differences of the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) in Determining the Choice of Investing in the Jakarta Islamic Index (JII). There were two balance methods that are still used as the approach material for accuracy in predicting expected return. The two models were the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT). In predicting CAPM company stock returns using risk-free return asset factors, market returns and beta while APT uses macroeconomic factors, namely interest rates, inflation, exchange rates and the money supply. The population in this study was 68 company shares after passing the purposive sampling stage, the sample of this study consisted of 27 mont...

The aim of the research was to identify the allocation of optimum portfolio formation in consumer goods sector at Indonesian Stock Exchange from 2014 to 2018 by using Black-Litterman model. This quantitative research used secondary data on stock prices of the consumer goods sector on the Indonesian Stock Exchange from January 2014 to December 2018 which was obtained from Yahoo Finance and the Indonesia Stock Exchange. Four stocks formed the optimum portfolio of consumer goods sector identified by using Black-Litterman model. Those are stocks of PT Indofood CBP Sukses Makmur Tbk, PT Kimia Farma Tbk, PT Indofarma Tbk, PT Indofarma Tbk, and PT HM Sampoerna Tbk. The results show that stock with the biggest proportion was ICBP’s with proportion of 68,5379%. Meanwhile the smallest proportion was INAF’s, which is 3,0277%. The mean return was calculated from this proportion, resulting in 3,678% while the risk value was 1,471%.

This paper integrates the long-run covariance between aggregate consumption and firm earnings into the stock valuation process. After assuming that firms adjust their dividend payments toward a target dividend payout ratio, we use the intertemporal framework of the consumption capital asset pricing model (CCAPM) to explore the effect of systematic earnings risks on intrinsic stock values. Our main results show that the equilibrium price of a stock is positively related to its long-run earnings growth rate, and negatively related to its earnings-consumption beta, obtained from its long-run covariance between earnings growth and aggregate consumption growth. This suggests that long-run risk measured with earnings affects the theoretical value of a firm. Overall, our work suggests that the long-run concept of risk, using accounting earnings, represents an appropriate parameter for estimating the equity value of a firm. He has published several papers in refereed scientific journals.

This paper investigates the theoretical relationship between earnings, risks and dividends, in an intertemporal context. After assuming that firms adjust their dividend payments toward a target dividend payout ratio, we utilize the framework of the consumption capital asset pricing model (CCAPM) to examine the effect of systematic earnings risk on dividend policy. Our main result indicates that the dividend payout ratio of a firm is negatively related to its earnings consumption beta, obtained from the covariance between aggregate consumption and earnings. This result suggests that risk measured with earnings influences dividend policy. This result also suggests that the earnings consumption beta integrates the multiple dimensions of a firm's earnings risk.

In this note, we integrate the long-run concept of risk into the stock valuation process, using the conditional capital asset pricing model. Our main result indicates that the intrinsic value of a stock is positively related to its long-run dividend growth rate, and negatively related to its long-run covariance between dividends and aggregate dividends. This result suggests that the theoretical framework of the conditional capital asset pricing model can be used to examine the effect of long-run risk on firm values. This result also suggests that the long-run covariance between dividends and aggregate dividends represents a relevant measure of risk, without assuming anything about aggregate consumption. Citation: Claude Bergeron and Tov Assogbavi and Jean-pierre Gueyie, (2020) ''Conditional capital asset pricing model, long-run risk, and stock valuation'', Economics Bulletin, Volume 40, Issue 1, pages 77-86 Contact: Claude [email protected], Tov [email protected], Jean-pierre [email protected].

Dalam berinvestasi, baik dalam asset keuangan maupun asset riil seseorang atau perusahaan pasti akan mengharapkan pengembalian atas investasinya. Dalam investasi pada asset keuangan khususnya saham ada dua model untuk memprediksi return investasi. Model yang pertama yaitu CAPM, model ini mengasumsikan bahwa return saham dipengaruhi satu faktor yaitu return market. Model yang kedua yaitu model APT, model ini mengasumsikan jika investor memiliki peluang untuk meningkatkan return tanpa meningkatkan risiko maka investor tersebut akan memanfaatkan peluang tersebut. Sehingga dalam model APT ini faktor-faktor yang mempengaruhi return saham lebih banyak dari pada model CAPM. Kedua model tersebut pada dasarnya dapat memprediksi return yang diharapkan investor, namun berbeda dalam variabel yang digunakan. Capital Asset Pricing Model (CAPM) yang diperkenalkan oleh Sharp (1964) dan Linmer (1965) merupakan model untuk menentukan harga suatu assets pada kondisi equilibrium. Dalam keadaan equilibirium tingkat keuntungan yang disyaratkan oleh pemodal untuk suatu saham akan dipengaruhi oleh risiko saham tersebut. Dalam hal ini risiko yang diperhitungkan adalah risiko sistematis yang diwakili oleh beta, karena resiko yang tidak sistematik bisa dihilangkan dengan cara diversifikasi.

ABSTRAK Penelitian ini bertujuan untuk mengetahui diantara dua model manakah yang paling akurat dalam memprediksi return saham. Kedua model tersebut adalah capital asset pricing model (CAPM) dan arbitrage pricing theory (APT). Populasi dalam penelitian ini merupakan saham Perusahaan Industri Barang Konsumsi yang terdaftar di Bursa Efek Indonesia periode 2013-2015. Metode penarikan sampel yang digunakan dalam penelitian ini adalah purposive sampling, dengan metode ini sampel yang dihasilakan sebanyak 18 perusahaan. Data penelitian berupa harga saham penutupan perusahaan diperoleh dari website www.idx.co.id, data Indeks Harga Saham Gabungan diperoleh dari website finance.yahoo.com, dan data inflasi, kurs, jumlah uang beredar serta suku bunga Bank Indonesia diperoleh dari website www.bi.go.id. Keakuratan model CAPM dan APT dihitung dengan menggunakan Mean Absolute Deviation (MAD). Hasil penelitian menunjukkan bahwa model CAPM lebih akurat daripada model APT dalam memprediksi return saham perusahaan industri barang konsumsi periode 2013-2015. Kata kunci : CAPM, APT, Return aktual, Return ekspektasi, saham.

Objective – A previous study conducted by the same authors found that the conditions of market overreaction occurred in Indonesia and the market factor in CAPM, or a single beta, is able to explain the portfolio returns. As a continuation of that study, we now use the concept of conditional CAPM, or a dual beta, to test whether the performance of the dual beta can outperform the single beta.
Methodology/Technique – The research uses the stocks of non-financial sector company on the Indonesian Stock Exchange during the period between July 2005 and December 2015, which have been divided into two portfolios; the winner and the loser. The conditional CAPM is applied by separating the market into upstream markets and downstream markets, so the dual beta model can be formulated.
Findings – The results are consistent with the findings of Pettengill et al. (1995). The results of a single beta test do not comply with the conditions required in the CAPM model and this can be corrected through conditional beta testing that includes the testing on the up beta, down beta, and the dual beta.
Novelty – The dual beta model can explain the returns of the portfolio in accordance with the expected results in CAPM testing. The explanation by using the dual beta model is more accurate and more successful than the single beta model.
Type of Paper: Empirical.

The CAPM under the means of the two step regression procedure indicated that the cross section of average excess security return is positively related to beta. Under a frame of Computational Econometrics the two step regression procedure is implemented into CAPM, concluding that the strict CAPM test rejects the second H 0 hypothesis on the market risk premium, hence the slope of the Security Market Line (SML) is different from the slope of SML indicated by CAPM. Consequently the CAPM has not a statistical significance in Portfolio Selection.