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2015 | OriginalPaper | Buchkapitel

28. Can We Use the CAPM as an Investment Strategy?: An Intuitive CAPM and Efficiency Test

verfasst von : Fernando Gómez-Bezares, Luis Ferruz, Maria Vargas

Erschienen in: Handbook of Financial Econometrics and Statistics

Verlag: Springer New York

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Abstract

The aim of this chapter is to check whether certain playing rules, based on the undervaluation concept arising from the CAPM, could be useful as investment strategies, and can therefore be used to beat the Market. If such strategies work, we will be provided with a useful tool for investors, and, otherwise, we will obtain a test whose results will be connected with the Efficient Market Hypothesis (EMH) and with the CAPM.

The basic strategies were set out in Gómez-Bezares, Madariaga, and Santibáñez (Análisis Financiero 68:72–96, 1996). Our purpose now is to reconsider them, to improve the statistical analysis, and to examine a more recent period for our study.

The methodology used is both intuitive and rigorous: analyzing how many times we beat the Market with different strategies, in order to check whether beating the Market happens by chance. Furthermore, we set out to study, statistically, when and by how much we beat it, and to analyze whether this is significant.

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Sharpe (1964), Lintner (1965).

One of its main defenders has been Fama (1970, 1991, 1998).

There are also other four key ideas.

A fundamental concept, predating the other two and clearly related to the CAPM and the EMH.

See Gómez-Bezares and Gómez-Bezares (2006). Also of interest could be Dimson and Mussavian (1998, 1999).

The interesting work by Danielson, Heck and Shaffer (2008) is also worth looking at.

We refer to the situation we have described previously which occurred at the beginning of the 1970s.

See also Copeland, Weston, and Shastri (2005, p. 244).

Recent studies that use these indices are, for example, Samarakoon and Hasan (2005), Abdel-Kader and Qing (2007), Pasaribu (2009), Mazumder and Varela (2010), and Ferruz, Gómez-Bezares, and Vargas (2010).

We have not extended our analysis beyond March 2007 in order to exclude the period of the global financial crisis which had a very damaging effect on major companies listed on the IBEX 35, such as banks, as this could have distorted our results.

The average Market capitalization of a stock in the Index is the arithmetic average of the result we obtain when multiplying the stocks allowed to be traded in each session during the monitoring period by the closing price of the stock in each of those sessions.

The monitoring period is the 6-month period ending prior to each ordinary meeting of the Commission.

This has been constructed as a simple average of returns for the stocks comprising the IBEX 35 each month, corrected for dividend distributions, splits, etc. Of course, in this case, it is not necessary that there be at least 36 months of prior quotations for the stocks to be included in the portfolio.

Initially, we intended to let the beginning of the second subperiod be the launch date of the IBEX 35 (January 1992), however, given the requirement that we set ourselves of a prior 36-month period to compute the betas of the model, we had to move this forward to December. Likewise, it was originally our intention that the beginning of the first subperiod be the launch date of the Continuous Market (April 1989) but most of the securities included in our study were listed for the first time in December 1989, so data could only be obtained from that date onward.

And for which there is a minimum of 36-monthly data prior to the month analyzed so that the beta can be calculated. In the case of companies which have recently merged, the beta is calculated by looking at the weighted average monthly returns on the companies prior to the merger. The weighting is proportional to the relative importance of each company involved in the merger.

We look at the return obtained by our investor from capital gains, dividends, and the sale of preemptive rights. The returns are also adjusted to take splits into account.

The return on the Market portfolio is calculated based on a simple average of the returns gained by the stocks which comprise the IBEX 35 in each month. The reason we decided to build our own portfolio rather than relying on a stock Market index such as the IBEX 35 itself is that we wanted to obtain an index corrected by capital gains, dividends, splits, and preemptive rights. Moreover, an equally weighted portfolio is theoretically superior.

Overvalued stocks are not included in our analysis as we decided to exclude short selling.

In this second variant, although the quartiles are built based on Treynor’s ratio, we continue to use Jensen’s index to work out whether or not a stock is undervalued. This is because of the problems we have encountered when determining which stocks are undervalued using Treynor’s ratio. These are related to the return premiums and the negative betas which appear in some cases in our database. Naturally, we take on board the problems of using Treynor’s ratio to construct the quartiles, as there could be stocks with positive alphas and low Treynor ratios which would exclude such stocks from the analysis. This is due to the form of Treynor’s ratio as a quotient.

Which have been calculated with the 36 previous months’ data.

If the CAPM and the efficient Market hypothesis are fulfilled exactly, the results of any portfolio (adjusted for risk) should match, as an average, with those of the Market. Here we suppose that, by pure chance, for any given month, they will end up 50 % above and 50 % below the Market average.

Which have a track record of at least 36 months in the Market. If, in a given month, there is a stock which is listed on the IBEX35 but does not have at least 36 months of prior data, this will be included in our study in the month in which it reaches this figure, unless by that stage it has already been deleted from the IBEX35.

We have not included the transaction costs, which undoubtedly would be higher for the managed portfolio and, therefore, would make that strategy less attractive.

See Appendix.

See Agresti (2007), Anderson et al. (2011), Conover (1999) and Newbold et al. (2009) for a widening of the statistical processing used in this Appendix.

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Titel: Can We Use the CAPM as an Investment Strategy?: An Intuitive CAPM and Efficiency Test
verfasst von: Fernando Gómez-Bezares
Luis Ferruz
Maria Vargas
Verlag: Springer New York
Buch: Handbook of Financial Econometrics and Statistics
Print ISBN: 978-1-4614-7749-5

Electronic ISBN: 978-1-4614-7750-1

Copyright-Jahr: 2015
DOI: https://doi.org/10.1007/978-1-4614-7750-1_28