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Testing the CAPM: Evidences from Italian Equity Markets

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  • Canegrati, Emanuele

Abstract

The aim of the following work is to exploit principal econometric tecniques to test the Capital Asset Pricing Model theory in Italian equity markets. CAPM is a financial model which describes expected returns of any assets (or asset portfolio) as a function of the expected return on the market portfolio. In this paper I will first explain the meaning of the market risk and I will measure it via the estimation of beta coeffcients, which are seen as a measure of assets sensitivity to market portfolio fluctuations. The theoretical framework is based on the Sharpe (1964) and Lintner (1965) version of the CAPM and on the Pettengill's hypothesis (1995) over the relationship between betas and returns. Secondly, I will test the presence of specific effects which usually occur in financial markets; in particular, I will check the presence of the well-known January effect and detect the existence of structural breaks over the considered period of time.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10407.

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Date of creation: 10 Sep 2008
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Handle: RePEc:pra:mprapa:10407

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Keywords: CAPM; Structural breaks; January effect;

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  1. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, American Finance Association, vol. 19(3), pages 425-442, 09.
  2. Gu, Anthony Yanxiang, 2003. "The declining January effect: evidences from the U.S. equity markets," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 43(2), pages 395-404.
  3. Elsas, Ralf & El-Shaer, Mahmoud & Theissen, Erik, 2003. "Beta and returns revisited: Evidence from the German stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 13(1), pages 1-18, February.
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