The capital asset pricing model and arbitrage pricing theory on the Johannesburg Stock Exchange

Abstract

This paper investigates the two most well known asset pricing theories within the context of the Johannesburg Stock Exchange (JSE). The theoretical and empirical underpinnings of both tlie capital asset pricing model (CAPM) and the arbitrage pricing theory (APT) are reviewed. Various empirical studies are contained within the body of the paper. Ih e layout of the paper follows both a logical and historical development. Before any study of capital markets can proceed, it is necessary to determine whether that market is efficient or not. After a literature review this paper proceeds on the assumption that the JSE is sufficiently efficient for the ourposes of the study. Chapter three of the paper contains both a literature review on the CAPM and empirical work. In this chapter, it is shown that the stable Paretian distribution hypothesis is not a valid descriptor of share return distributions, this allows us to proceed with the use of standard statistical methods in later studies. Later in the chapter it is shown that the number of stocks within a diversified portfolio should exceed the amount normally advocated in the literature. Finally, it shown, using the traditional tests that the standard CAPM is not well specified for the JSE. Chapter four contains a review of the anomalies within the CAPM ana some of the attacks that have been made on that theory. Here it is shown that the CAPM is not well specified on the JSE by making use of a multivariate test. As regards market anomalies, it is shown that the "Monday effect" is absent from the JSE. It was previously thought that this anomaly was present in the pattern of returns. We are able to confirm that there is no "turn of the year effect".