Further Evidence on the Validity of CAPM: the Istanbul Stock Exchange Application

Rumeysa Bilgin; Eyup Basti

doi:10.5755/j01.ee.25.1.1847

Authors

Rumeysa Bilgin Fatih University, Department of Management
Eyup Basti Fatih University, Department of Banking and Finance

DOI:

https://doi.org/10.5755/j01.ee.25.1.1847

Keywords:

asset pricing, risk-return relationship, the standard CAPM, the conditional CAPM, Istanbul Stock Exchange

Abstract

As one of the most important models in the finance literature, the Capital Asset Pricing Model (CAPM) assumes the existence of a positive and linear relationship between the systematic risk and required rates of return on stocks. The model is extensively researched in the academia and frequently used in business world since its development half a century ago. Its popularity comes from the simplification it provides for the complex process of asset pricing by making the assumption that only one single factor affects stock returns. But, as this is an unrealistic assumption, the validity of the model in its standard (unconditional) form is repeatedly rejected by empirical tests. Pettengill et al. (1995) developed an alternative conditional CAPM approach where the standard model is improved by taking bull and bear market conditions into consideration. According to this model, there is a positive (negative) risk-return relationship during up (down) market periods. Using this reasoning, Pettengill et al. (1995) tested up and down market periods separately and reached highly significant results that support CAPM.

In this study, both the unconditional and conditional versions of CAPM are tested in the Istanbul Stock Exchange (ISE) for the period of nine years from 2003 to 2011. The test period is divided into four sub-periods. The unconditional CAPM is rejected for the sample period. A result of the conditional test shows that there is a statistically significant conditional relationship during some sub-periods. However, since the risk-return relationship in up and down markets is not symmetric, this conditional relationship does not indicate a positive risk-return tradeoff. Thus, CAPM may not be a useful asset pricing model for the ISE.

DOI: http://dx.doi.org/10.5755/j01.ee.25.1.1847

Author Biographies

Rumeysa Bilgin, Fatih University, Department of Management

Rumeysa Bilgin was born in 1983 in Istanbul, Turkey. She received her BSc from University of London External Programme-London School of Economics and Political Sciences on the subject of Information Systems and Management in 2008. She obtained her MA from Fatih University, Department of Management on the subject of Finance in 2012. Her MA thesis is about asset pricing models and involves the application of asset pricing models in the Istanbul Stock Exchange. Her main research interests are the development and application of asset pricing models, behavioral finance, and corporate valuation.

Eyup Basti, Fatih University, Department of Banking and Finance

Assoc. Prof. Eyup Bastı is the head of the Banking and Finance Department of Faculty of Economic and Administrative Sciences at Faith University, Turkey. He received his BA degree on Management from Middle East Technical University in 1996 and his MBA from Fatih University in 1998. He obtained His PhD degree from Istanbul University in Finance in 2004 with a thesis titled as “2001 Financial Crisis of Turkey in the Light of Financial Crises Theories: The Effects of Financial Crisis on the Efficiency of Turkish Financial Sector.” His PhD thesis is published by the Capital Market Boards of Turkey. He wrote numerous articles published in Turkish and foreign scientific journals. His current research interests are financial crises, mortgage, corporate valuation, financial performance of firms, investments, and asset pricing.