Verification of a linear dependence between the risk premium and the systematic risk: Empirical testing based on data from PSE
| Authors | |
|---|---|
| Year of publication | 2013 |
| Type | Article in Proceedings |
| Conference | EUROPEAN FINANCIAL SYSTEMS 2013: PROCEEDINGS OF THE 10TH INTERNATIONAL SCIENTIFIC CONFERENCE |
| MU Faculty or unit | |
| Citation | |
| Field | Economy |
| Keywords | Risk premium; systematic risk; linearity; CAPM |
| Description | In our article we focus on an empirical research of the Capital Asset Pricing Model. The equilibrium model is tested on the data from the Prague Stock Exchange. Our research is focused on the relationship of a systematic risk with an individual market premium. We verify, whether it is possible to identify an explanatory power of the market beta on an excessive return. We are dealing with the hypothesis whether it is possible to use a non-diversifiable risk as a crucial part of the explanatory factor for investment decisions. For the study the Black-Jensen-Scholes methodology will be used. We apply only the one factor model and its modified version. The conditions for the modification will depend on the nature of the market risk premium. Our analysis is applied to the period before the financial crisis, during the crisis and post-crisis. We believe that the analysis across the turbulent development enhances the credibility of our results. Although it is necessary to take into account the nature of the investigated market, especially its size and liquidity, the findings of our research confirm the explanatory power of the conditional CAPM to the return on investigated risk assets. In contrast, the results of the unconditional model could not be verified. While there are numerous studies dealing with the empirical testing of unconditional and conditional CAPM, according to our findings, there is no similar study with respect to the processing and application. The results of our research can be practically applied for active traders on the Prague Stock Exchange and similar markets. |
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