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Conditional perfomance evaluation of the CAPM on the WSE market

Ewa Majerowska 

Uniwersytet Gdański Wydział Zarządzania (WZR), Armii Krajowej 101, Sopot 81-824, Poland

Abstract

One of the most popular models that allows to price portfolios or assets is the CAPM model. During the last five decades appeared many modifications of the model such as zero-beta CAPM, consumption CAPM, etc. Economists try to adapt the model taking into account particular problems. Obtained results still confirm necessity of application of the CAPM, because it measures the level of the systematic risk that is needed for example in pricing enterprises (the cost of capital).

As first the conditional approach in estimation of the CAPM model proposed Ferson, Schadt [1996] and Ferson, Warther [1996]. In theirs papers conditional performance evaluation (CPE) was displayed as a method more appropriate for modelling expected return. The methodology assumes that portfolios structural parameters change over time.

The paper concentrates on portfolios created for assets traded on the WSE. Standard approach of the CPE assumes using the lagged macroeconomic variables as instruments in estimation process. The author of the paper suggests to employ as an instrument variability of returns of assets. The results confirm that the CPE method provides more effective estimates that traditional CAPM.
 

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Presentation: Oral at Current Economic and Social Topics CEST2013, Symposium on Financial Market Analysis, by Ewa Majerowska
See On-line Journal of Current Economic and Social Topics CEST2013

Submitted: 2013-04-24 14:25
Revised:   2013-04-25 09:11