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The Validity of CAPM and ICAPM in the Istanbul Stock Exchange

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  • Muhammad Muddasir
  • Gülşah Kulalı

Abstract

This study aims to answer the following research question: Are the Capital Asset Pricing Model (CAPM) and International Capital Asset Pricing Model (ICAPM) valid in the Istanbul Stock Exchange (ISE)? No broad agreement has been reached in the literature on this question, yet. Using an unbalanced panel of daily stock returns of companies in the BIST-30 index and as of BIST-100 index from March 2010 to February 2019, this paper seeks to provide new evidence on this discussion and explores whether the risk-expected return relationship is linear. In the empirical framework, panel regression analysis methodology is employed. Our findings indicate that both linear CAPM and linear ICAPM models are valid in ISE. Moreover, it is observed that the ICAPM outperforms the CAPM in explaining the stock returns for both indices. This outperformance is especially more pronounced for BIST-30 than BIST-100. Depending on these findings, investors can easily prioritize BIST-100 over BIST-30 when constructing portfolios to reduce risk in the Turkish market, given the fact that exchange rate-relevant diversification is greater in BIST-100.

Suggested Citation

  • Muhammad Muddasir & Gülşah Kulalı, 2024. "The Validity of CAPM and ICAPM in the Istanbul Stock Exchange," Journal of Research in Economics, Politics & Finance, Ersan ERSOY, vol. 9(1), pages 26-42.
    • Handle: RePEc:ahs:journl:v:9:y:2024:i:1:p:26-42
    DOI: 10.30784/epfad.1383837
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    References listed on IDEAS

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    1. Tom A. FEARNLEY, 2002. "Estimation of an International Capital Asset Pricing Model with Stocks and Government Bonds," FAME Research Paper Series rp95, International Center for Financial Asset Management and Engineering.
    2. Brooke Alexandra Maeda, 2016. "An Empirical Review of Asset Pricing Models for the Japanese Share Market," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(11), pages 155-158, November.
    3. Foerster, Stephen R. & Sapp, Stephen G., 2005. "Valuation of financial versus non-financial firms: a global perspective," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(1), pages 1-20, January.
    4. Brooke Maeda, 2016. "An Empirical Review of Asset Pricing Models for the Japanese Share Market," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(11), pages 155-155, November.
    5. Bianconi, Marcelo & MacLachlan, Scott & Sammon, Marco, 2015. "Implied volatility and the risk-free rate of return in options markets," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 1-26.
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    Keywords

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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