The applicability of the Capital Asset Pricing Model (CAPM) in the Japanese stock market: an empirical test of the capital asset pricing model on the Tokyo stock exchange over the period of 2012-2022

Abstract

Objectives The main objectives of this study were to examine the validity of the Capital Asset Pricing Model (CAPM) in predicting the actual rates of return on a stock portfolio over the period of 2012-2022. The study therefore aims at answering three main research questions:

1. Is there a positive linear relationship existing between the portfolio’s actual returns and systematic risk, measured by Beta? 2. Does this relationship hold significance overall? 3. Is there a preferred time frequency–weekly/daily/monthly that CAPM beta performs better than the others?

Summary Using the Nikkei 225 as the market benchmark index and constructing a portfolio of 30 publicly traded stocks on the TSE randomly selected from the Nikkei 225 index list, daily, weekly, and monthly beta values for each individual stock and their average returns are computed from the adjusted close price over the period of January 2012 to 2023. The results from linear regression tests for each pair of three times intervals show that only on a monthly basis that the relationship between beta and actual rates of return is significantly positive linear.

Conclusions The test results for weekly and monthly indicate that CAPM is not an applicable toolkit for investors to predict stocks on the JSE in short term period. In contrast, long-term investors holding stocks on this market could still employ the calculation of systematic risk- beta as a reliable method to predict the monthly movement of stocks.