3. Electronic Theses and Dissertations (ETDs) - All submissions

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Subject: search.filters.subject.Capital asset pricing model

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    Market derived capital asset pricing model: cost of equity capital in a South African context
    (2013-08-22) Chivaura, Samuel William
    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.
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    Reviving Beta? Another look at the cross-section of average share returns on the JSE
    (2012-07-05) Page, Daniel
    Van Rensburg and Robertson (2003a) stated that the CAPM beta has little or no relationship with returns generated by size and price to earnings sorted portfolios. This study intends to demonstrate that a reformulated CAPM beta, estimated using return on equity as opposed to share returns, unravels the size and value premium. The study proves that the “cash-flow” generated beta partially explains the cross-sectional variation in share returns when measured over the long run, specifically when portfolios are sorted on book to market, however the cash flow beta is less successful when attempting to explain the small size premium. The premise of the study is that the cash flow dynamics of share returns eventually dominate the first and second moments and thus result in cash flow based measures of risk and return that should succeed in explaining the cross-sectional variation in share returns. The study makes use of vector autoregressive models in order to examine the short term effect of structural shocks to the cash flow fundamentals of a stock or portfolio through impulse response functions as well as quantifying a long-term relationship between cash flow fundamentals and share returns using a VECM specification. The study further uses fixed effects, random effects and GMM/dynamic panel data cross-sectional regressions in order to examine the ability of the cash flow beta explaining the value and size premium. The results of the study are mixed. The cash flow beta does well in explaining the returns of portfolios sorted on book to market, but fails to do the same with size sorted portfolios. In the cash flow betas favour, it performs far better than the conventionally measured CAPM beta throughout the study.
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