Download - Empirical testing of the CAPM on the JSE
Empirical testing of the CAPM on the JSE
Mike Ward, Chris MullerGordon Institute of Business Science
University of PretoriaNERSA Conference
August 2012
An economic return on the RAB?
Regulatory Asset Base
Shareholder Capital
Debt Capital
The cost of equity“The CAPM”
Re = Rf + β.MRP
The cost of debt
The Capital Asset Pricing Model
Beta = 1.0
Retu
rn
Rf = 7%
MarketRiskPremium = 5%
High beta shares are
more risky, so give better
returns
0.8
Rf = 11%
Risk (beta)
Betting Against Beta, Andrea Frazzini and Lasse H. Pedersen, Oct 2011
Prior ResearchData: All US Shares 1928 - 2009
Betting Against Beta, Andrea Frazzini and Lasse H. Pedersen, Oct 2011
Data: 18 International Markets 1984 - 2009
Fama and French (2004) estimated betas for every share on the NYSE, AMEX and NASDAQ from 1923 – 2003 using 2-5 years prior
data and compared with their return over the next 12 months:
Prior research on the JSE• Strugnell, Gilbert & Kruger (2011) IAJ
– “Beta has no predictive power for returns on the JSE”
– Data from 1994 – 2007– Included too many small shares
• van Rensburg & Robertson (2003) IAJ– “If anything, beta is inversely related to
returns!”– Data from 1990 – 2000– Included too many small shares
Rational for research• The CAPM is a pillar of financial
theory:– taught on all finance courses– found in all finance text books– used regularly in the financial services
industry– Markowitz, Miller & Sharpe shared a
Nobel prize• We have 25 years of JSE data
– 1985 to 2011• We can improve on the methodology
Methodology• Select the largest 160 companies in Dec 1984• Estimate betas using prior years return data
– OLS beta• 60 monthly data points
– Dimson• Multiple regression (+1,0,-1,-2,-3,-4)
• Rank betas• Construct 5 equal weighted portfolios of 32
shares• Measure portfolio return over the next 3
months• Repeat for next quarter
99% of JSE’s market capitalisation
Presentation of findings• We track the daily value of each
portfolio (quintile)• We re-balance each portfolio quarterly
– We retain the value of the portfolio– Equally weight– We ignore transaction costs
• We graph the results• We benchmark against the ALSI total
return index• We plot a price relative versus the
J203
Results
OLS Betas - monthly
Dec-84
Dec-85
Dec-86
Dec-87
Dec-88
Dec-89
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
0.016
0.156
1.563
15.625
156.250
7.7%
12.1%
18.1%
21.6%20.4%
-10.5%
15.8%
-6.9%
BetaOLS60m1BetaOLS60m2BetaOLS60m3BetaOLS60m4BetaOLS60m5RelativeJ203TRelative to J203T
OLS Betas - weekly
Dec-84
Dec-85
Dec-86
Dec-87
Dec-88
Dec-89
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
0.016
0.156
1.563
15.625
156.250
4.6%
15.4%
20.4%19.9%19.3%
-12.3%
15.8%
-9.6%
BetaOLS104w1BetaOLS104w2BetaOLS104w3BetaOLS104w4BetaOLS104w5RelativeJ203TRelative to J203T
Dimson Betas - monthly
Dec-84
Dec-85
Dec-86
Dec-87
Dec-88
Dec-89
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
0.016
0.156
1.563
15.625
156.250
7.9%
16.3%
19.3%19.0%17.4%
-8.1%
15.8%
-6.8%
BetaDimson60m1BetaDimson60m2BetaDimson60m3BetaDimson60m4BetaDimson60m5RelativeJ203TRelative to J203T
Dimson Betas - weekly
Dec-84
Dec-85
Dec-86
Dec-87
Dec-88
Dec-89
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
0.016
0.156
1.563
15.625
156.250
5.7%
15.3%
19.0%19.5%20.8%
-12.5%
15.8%
-8.7%
BetaDimson104w1BetaDimson104w2BetaDimson104w3BetaDimson104w4BetaDimson104w5RelativeJ203TRelative to J203T
Volatility - Daily
Summary of Results
Annualised returns for equal weighted portfolio quintiles over the period 31Dec1986 - 31Dec2011
Risk MeasureNumber of Obs
ALSI Index R203
Highest Beta
QuintileQuintile
2Quintile
3Quintile
4
Lowest Beta
QuintileOLS Monthly Beta 60 15.7% 7.7% 12.1% 18.1% 21.6% 20.4%OLS Weekly Beta 104 15.7% 4.6% 15.4% 20.4% 19.9% 19.3%Dimson Monthly Beta 60 15.7% 7.9% 16.3% 19.3% 19.0% 17.4%Dimson Weekly Beta 104 15.7% 5.7% 15.3% 19.0% 19.5% 20.8%Volatility Daily 60 15.7% 9.7% 13.5% 17.7% 20.8% 18.2%Average annualised Return 15.7% 7.1% 14.5% 18.9% 20.2% 19.2%
Dec 8
4
Dec 8
5
Dec 8
6
Dec 8
7
Dec 8
8
Dec 8
9
Dec 9
0
Dec 9
1
Dec 9
2
Dec 9
3
Dec 9
4
Dec 9
5
Dec 9
6
Dec 9
7
Dec 9
8
Dec 9
9
Dec 0
0
Dec 0
1
Dec 0
2
Dec 0
3
Dec 0
4
Dec 0
5
Dec 0
6
Dec 0
7
Dec 0
8
Dec 0
9
Dec 1
0
Dec 1
1
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
Portfolio 1 (Beta VH)
Portfolio 2 (Beta H)
Portfolio 3 (Beta M)
Portfolio 4 (Beta L)
Portfolio 5 (Beta VL)
Style: BetaOLS60m
Characteristic: BetaOLS60m
Conclusion:
High risk (beta) = Low return
Ben Graham once argued that: "Beta is a more or less useful measure of past price fluctuations of common stocks. What bothers me is that authorities now equate the beta idea with the concept of risk.
Questions…
• For those interested:• The full paper will be published in the forthcoming:
– Investment Analyst Journal– http://www.iassa.co.za/journals/