TY - CHAP
T1 - The application of Capital Asset Pricing Model (CAPM) to individual securities on Ghana stock exchange
AU - Coffie, William
AU - Chukwulobelu, Osita
PY - 2012
Y1 - 2012
N2 - Purpose - The purpose of this chapter is to examine whether or not the Capital Asset Pricing Model (CAPM) reasonably describes the return generating process on the Ghanaian Stock Exchange using monthly return data of 19 individual companies listed on the Exchange during the period January 2000 to December 2009. Methodology/approach - We follow a methodology similar to Jensen (1968) time series approach. Parameters are estimated using OLS. This study is designed to measure beta risk across different times by following the time series approach. The betas of the individual securities are estimated using time series data of the excess return version of the CAPM. Findings - Our test results show that although market beta contributes to the variation in equity returns in Ghana, its contribution is not as significant as predicted by the CAPM, and in some cases very weak. Our results also reject the strictest form of the Sharpe-Lintner CAPM, but we found positive linear relationship between equity risk premium and market beta. Instead, our evidence uphold the Jensen (1968) and Jensen, Black, and Scholes (1972) versions of the CAPM. Research limitations/implications - This study is limited to the single-factor CAPM. Future studies will extend the test to include both size and BE/ME fundamentals and factors relating to P/E ratio, momentum and liquidity. Practical implications - Our results will make corporate managers to be cautious when using CAPM as a basis to determine cost of equity for investment appraisal purposes, and fund managers when evaluating asset and portfolio performance. Originality/value - The CAPM is applied to individual securities instead of portfolios, since the model was developed using information on a single security.
AB - Purpose - The purpose of this chapter is to examine whether or not the Capital Asset Pricing Model (CAPM) reasonably describes the return generating process on the Ghanaian Stock Exchange using monthly return data of 19 individual companies listed on the Exchange during the period January 2000 to December 2009. Methodology/approach - We follow a methodology similar to Jensen (1968) time series approach. Parameters are estimated using OLS. This study is designed to measure beta risk across different times by following the time series approach. The betas of the individual securities are estimated using time series data of the excess return version of the CAPM. Findings - Our test results show that although market beta contributes to the variation in equity returns in Ghana, its contribution is not as significant as predicted by the CAPM, and in some cases very weak. Our results also reject the strictest form of the Sharpe-Lintner CAPM, but we found positive linear relationship between equity risk premium and market beta. Instead, our evidence uphold the Jensen (1968) and Jensen, Black, and Scholes (1972) versions of the CAPM. Research limitations/implications - This study is limited to the single-factor CAPM. Future studies will extend the test to include both size and BE/ME fundamentals and factors relating to P/E ratio, momentum and liquidity. Practical implications - Our results will make corporate managers to be cautious when using CAPM as a basis to determine cost of equity for investment appraisal purposes, and fund managers when evaluating asset and portfolio performance. Originality/value - The CAPM is applied to individual securities instead of portfolios, since the model was developed using information on a single security.
KW - Capital Asset Pricing Model
KW - Error correction mechanism
KW - Stock market
KW - Time series analysis
KW - Unit root
UR - http://www.scopus.com/inward/record.url?scp=84888382599&partnerID=8YFLogxK
U2 - 10.1108/S1479-3563(2012)000012B010
DO - 10.1108/S1479-3563(2012)000012B010
M3 - Chapter
AN - SCOPUS:84888382599
SN - 9781781902240
T3 - Research in Accounting in Emerging Economies
SP - 121
EP - 147
BT - Finance and Development in Africa
A2 - Menyah, Kojo
A2 - Abor, Joshua
ER -