Market derived capital asset pricing model: cost of equity capital in a South African context
Date
2013-08-22
Authors
Chivaura, Samuel William
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Abstract
The Capital Asset Pricing Model (CAPM) is widely used in estimating cost of equity capital.
CAPM relies on historical data to estimate beta which is subsequently used to calculate ex-ante
returns. Several authors have highlighted anomalies with CAPM and have proposed various
models that capture these anomalies. This study investigates the Market Derived Capital Asset
Pricing Model (MCPM), an ex-ante model that uses traded option premium prices and implied
volatility to determine ex-ante equity risk premium used in estimating cost of equity capital. The
implied volatility captures future market risk expectation of a firm. This is of importance to
corporate managers who need to establish appropriate hurdle rates when making capital
budgeting decisions. Additionally, investors need to determine expected returns based on future
risk outlook of an investment. Using data from the South African Johannesburg Stock
Exchange (JSE) listed firms’, a comparison of cost of equity capital estimates was done using
CAPM, Fama and French Three-Factor Model and MCPM. The results show MCPM’s yields
higher estimates compared to CAPM and Three-Factor Model.
Description
Thesis (M.M. (Finance & Investment))--University of the Witwatersrand, Faculty of Commerce, Law and Management, Graduate School of Business Administration, 2013.
Keywords
Capital asset pricing model, South Africa, Investments, Rate of return