A Comparison in Efficacy of Multiple CAPMs in Vietnam, Singapore and the United States
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School of Business | Bachelor's thesis
(Mikkeli) Bachelor’s Program in International Business
AbstractObjectives This research attempts to tackle a popular subject, that is CAPM in a different perspective, by comparing the performance of both standard and augmented CAPMs among developing market in Asia region and already popular US market. My objective is to determine if there exist a difference in performance relativity among models and regions, and to suggest any possible rationale behind further research. Summary This paper contrasts three capital asset pricing models (CAPM), standard and augmented with Size to Market, Book to Market factors (Fama and French, 1993) and simple turnover factor of Datar et a. (1998) in a simple Ordinary Least Squared regression test for efficiency power. The sample used is formed from blue-chip indices components of three countries including Vietnam, Singapore, and the United States of America for comparison among regions, as the Eastern region certainly holds multiple different indigenous values despite the adoption of Western culture during the colonial period. Conclusions The finding suggests that there is a considerable difference in terms of market characteristics, thus renders the CAPM much weaker in less developed market such as Vietnam’s. However, it must be noted that overall, the standard CAPM of Sharpe (1964) and Lintner (1965) has such a poor empirical record that it can be considered irrelevant for realistic usage. This is much aligned with the conviction held by Fama and French (1993) and many others. Nevertheless, I find out that in my studied time frame, the Fama and French 3-factor model outperforms the standard CAPM significantly, and thus suggest possibility for even more augmented models to attempt to project the expected returns of either individual stocks or portfolios. Through my formation of portfolios, it is strongly suggested that different levels of liquidity play a major role in dictating the efficiency of the CAPM, as the high liquidity level portfolios of the same region would always be better explained with higher adjusted R-square level. However, the simple daily turnover rate augmented model of Datar et al. (1998) does not enhance the standard model by any means. I believe that in a longer time frame, under the implementation of the Liu’s (2006) measure, the explanatory power of the augmented CAPM might be significantly improved. Overall, my findings are important to investment managers seeking to hedge their current portfolio risks through global investment in the Asian region. I contribute to the academia by raising the attention toward this region with my research, and expect follow-ups, especially those that can amend my limitations. Also, this paper attempts to dictate the main factor that differentiates the Eastern and the Western market, namely liquidity, and urges further research upon this matter to improve the CAPM.
Thesis advisorHenderson, David
asset management, CAPM, investment, liquidity, 3-factor CAPM, South-East Asia, Vietnam, Singapore