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The Performance Of Asset Pricing Models Before, During, And After Financial Crisis In Emerging Market: Evidence From Indonesia

  • Erie Febrian

    ()

    (Finance & Risk Management Study Group (FRMSG) FE UNPAD)

  • Aldrin Herwany

    ()

    (Research Division, Laboratory of Management FE UNPAD)

Registered author(s):

    Due to dynamic challenge in stock market risk and return measurement, financial practitioners and academics are quite concerned with the development of asset pricing studies. Moreover, validity of the existing theories in the recent Asian financial difficult years stimulates another challenge to the discipline. This paper attempts to investigate the ability of CAPM and APT in explaining excess returns of portfolio of stocks traded in Jakarta Stock Exchange (JKSE). The study assesses validation of the theories using data from 3 different periods of the associated economic circumstances, i.e. pre-crisis period (1992-1997), crisis period (1997-2001), and post-crisis period (2001-2007). Our finding shows that Beta is not the single factor that can explain the portfolio excess returns. At the same time, APT is proven able to vindicate the portfolio excess returns in the observation periods, in which the excess return averages are found to be consistently negative. We also find that spread between the central bank rate and commercial bank rate is constantly significant variable, while risk-premiums vary over the observation periods.

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    File URL: http://lp3e.fe.unpad.ac.id/wpaman/200902.pdf
    File Function: First version, 2009
    Download Restriction: no

    Paper provided by Department of Management and Business, Padjadjaran University in its series Working Papers in Business, Management and Finance with number 200902.

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    Length: 20 pages
    Date of creation: Feb 2009
    Date of revision: Feb 2009
    Handle: RePEc:unp:wpaman:200902
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    1. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
    2. Fama, Eugene F & French, Kenneth R, 1995. " Size and Book-to-Market Factors in Earnings and Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 131-55, March.
    3. Shanken, Jay, 1982. " The Arbitrage Pricing Theory: Is It Testable?," Journal of Finance, American Finance Association, vol. 37(5), pages 1129-40, December.
    4. Cesare Robotti, 2002. "Asset returns and economic risk," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 13-25.
    5. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
    6. He, Jia & Ng, Lilian K, 1994. "Economic Forces, Fundamental Variables, and Equity Returns," The Journal of Business, University of Chicago Press, vol. 67(4), pages 599-609, October.
    7. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
    8. Roll, Richard, 1995. "An empirical survey of Indonesian equities 1985-1992," Pacific-Basin Finance Journal, Elsevier, vol. 3(2-3), pages 159-192, July.
    9. Fama, Eugene F & French, Kenneth R, 1996. " The CAPM Is Wanted, Dead or Alive," Journal of Finance, American Finance Association, vol. 51(5), pages 1947-58, December.
    10. Roll, Richard & Ross, Stephen A, 1994. " On the Cross-sectional Relation between Expected Returns and Betas," Journal of Finance, American Finance Association, vol. 49(1), pages 101-21, March.
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