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CAPM & Extension. Prepared for Econometrics By Prof. Keunkwan Ryu ISER & Seoul National University. CAPM and its Extension. CAPM : Single factor model of return (time series regression)
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CAPM & Extension Prepared for Econometrics By Prof. Keunkwan Ryu ISER & Seoul National University
CAPM and its Extension • CAPM : Single factor model of return (time series regression) • Fama & French(1992) : Addition of Size and Book to Market ratio to explain cross-sectional variation of returns.
Estimation of CAPM • OLS of Individual Stock Returns on the Market Portfolio Return(Market Portfolio: KOSPI) using monthly time series data. • Data: Monthly return data(1999. 2.-2001. 12.)
c.f. Time averages of the cross-sectional coefficient estimates in Fama & French (1992)
Time averages of the cross-sectional coefficient estimates in Korea (15 stocks)
Estimation Results Within parentheses are t-values.
Remarks • Fama & French (1992) “The Cross-Section of Expected Stock Returns,” Journal of Finance all nonfinancial firms, 336 monthly data c.f. Korean data: 15 firms, 35 monthly data • In Korea, no evidence of small firm effect (No size effect is significantly negative) • In Korea, no favorable market reaction to the undervalued stocks, that is those stocks with high book to market ratio. (No B/M ratio is significantly positive)