CAPM

1
CAPM Extension

• Prepared for Econometrics
• By Prof. Keunkwan Ryu
• ISER Seoul National University

2
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.

3
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.)

company beta t-value
Samsung Electronics 1.24 6.39
SK Telecom 0.95 3.71
KT 1.09 5.97
KEPCO 0.71 4.79
POSCO 1.00 8.12
4
Other Estimation Results
company beta (t-value) Company beta (t-value)
Daehan Electric Wire 0.69 (3.05) Keumkang Engineering 0.84 (2.84)
Hanmi Pharm. 0.51 (2.9) Motonic 0.53 (2.17)
Samyoung Electronics 0.87 (4.49) Chokwang Paint 0.39 (1.4)
Hansum 0.61 (2.93) Samlip food 0.33 (0.58)
Hanwha 1.05 (4.56) Samsung Pharm. 0.54 (1.68)
5
Testing ? 1 (I)
company beta-1 t-value
Samsung Electronics 0.24 1.26
SK Telecom -0.05 -0.19
KT 0.09 0.5
KEPCO -0.29 -1.93
POSCO 0 0
6
Testing ? 1 (II)
company beta-1 (t-value) company beta-1 (t-value)
Daehan Electric Wire -0.31 (-1.4) Keumkang Engineering -0.16 (-0.53)
Hanmi Pharm. -0.49 (-2.72) Motonic -0.47 (-1.96)
Samyoung Electronics -0.13 (-0.68) Chokwang Paint -0.61 (-2.18)
Hansum -0.39 (-1.86) Samlip food -0.67 (-1.18)
Hanwha 0.05 (0.22) Samsung Pharm. -0.46 (-1.44)
7
Cross-sectional Regressionsin Fama French
(1992)
8
c.f. Time averages of the cross-sectional
coefficient estimates in Fama French (1992)
model beta coefficient size coefficient book to market coefficient
(1) 0.15 (0.46) . .
(2) . -0.15 (-2.58) .
(3) . . 0.50 (5.71)
(4) -0.37 (-1.21) -0.17 (-3.41) .
(5) . -0.11 (-1.99) 0.35 (4.44)
9
Time averages of the cross-sectional coefficient
estimates in Korea (15 stocks)
overtime average model beta size book to market
(1) 3.44 (0.10)
(2) 0.26 (0.07)
(3) -19.06 (-1.93)
(4) 6.23 (0.12) -1.22 (-0.04)
(5) -4.43 (-1.19) -24.36 (-2.31)
10
Pooled Regressions (15 stocks on KSE, 1999.
2.-2001. 12.)
11
Estimation Results
Within parentheses are t-values.
beta size book to market
(1) 3.44 (0.10) . .
(2) . -0.1 (-0.03) .
(3) . . -6.24 (-2.67)
(4) 8.79 (0.18) -0.73 (-0.15) .
(5) . -3.15 (-0.90) -6.92 (-2.82)
(6) -16.42 (-0.33) -2.04 (-0.42) -7.07 (-2.83)
12
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)