Examining the ability of capital asset pricing model and arbitrage pricing theory model in predicting expected returns for stocks trading in Amman stock exchange (ASE)‎

Other Title(s)

فحص قدرة نموذج تسعير الأصول الرأسمالية و نموذج المراجحة في تسعير الأصول الرأسمالية على التنبؤ بقيمة العوائد المتوقعة للأسهم المتداولة في بورصة عمان

Dissertant

Abu Hammur, Khalil Hasan

Thesis advisor

Gharayibah, Hisham

Comitee Members

al-Fayyumi, Nidal Ahmad
al-Almi, wahib
al-Duri, Muayyad

University

Amman Arab University

Faculty

College of Business

Department

Department of Finance

University Country

Jordan

Degree

Ph.D.

Degree Date

2009

English Abstract

This study aimed to examine the ability of both, the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT) in predicting the expected returns for stocks trading in Amman Stock Exchange (ASE) during the period 2000 – 2007.

The study followed the two steps of regression approach to analyze data.

The first step includes the use of simple and multiple regression analysis to estimate the systematic risk premium (β), while in the second step of analysis, an estimate for the predictors, in the subsequent year obtained using beta estimates that resulted from first step of analysis as the explanatory variable in a cross-section regression analysis.

Also, this method has been used in previous academic studies.

The study used five years of monthly stock prices of sample which consists of 37 companies for testing CAPM.

In addition to that, the study depends on a priori approach of selecting factors through a macroeconomic variable to analyze APT model.

Accordingly, six factors were observed and used as independent factors.

They are Percentage Change in Money Supply (M2), the Change in Interstate, Trade Balance (TB), the Change in GDP, the change in Consumer Price Index (CPI or Rate of Inflation), and the Market Risk (Beta) which is also used in the first model (CAPM).

The empirical tests in this study found that both, CAPM, and APT are able to apply in Amman stock Exchange (ASE) during the period, and is considered a good tool of valuation assets return, cost of equity, and capital budgeting.

The single model of CAPM was able to predict on average, approximately 56.9% of the variations in asset returns for the overall sample period 2000 – 2007.

The tradeoff between average systematic risk "betas" and returns is positive and linear.

The APT model was able to predict on average approximately 77.4% of the changes in assets return for the overall sample period.

The tradeoff between average systematic risk "betas" and returns is positive and linear, and the intercept hypothesis in the regression equation represents the risk- free rate.

Also the study tested the performance of CAPM compared with APT, using "Davidson and MacKinnon Equation"; and found that (α) ranged from low of 0.769 up to 1.030 the results are heavily in favor of the APT in each sub-period as well as during the entire sample period.

Also, these results are consistent with findings obtained from cross-section analyses since the analyses indicate that the average coefficient of determination R², which indicates that APT, is able to explain in average approximately 77.4% of the variations in stocks returns in the market, while the ability of CAPM has less explanation power compared with APT and is able to explain nearly 56.4% in the variations of stock returns during the same period.

Finally, the study examined the systematic risk hypothesis "residuals" and concluded that the betas of the macroeconomic risk factors stated in this study are not the only risk measure which commands all risk premiums in the market, but there are other factors which are not included in this study; (foreign exchange rates, oil prices, correlation with global capital market and financial institution, and country risk) that may have a significant effect on determining asset returns and could explain the majority of variations in the asset prices process that could be an interesting topic for future research and investigation.

The study recommends the use of those models in estimating asset prices (returns) because they are considered one of the most important estimation methods in both emerging markets such as ASE as what this study proved, as well as in developed markets as what many previous studies proved

Main Subjects

Financial and Accounting Sciences

Topics

• Prices
• Financial markets
• Stocks
• Jordan

No. of Pages

214

Table of Contents

• APA
• MLA
• AMA

Language

English

Data Type

Arab Theses

Record ID

BIM-556535