ONANA, Bissaya Axel Didier

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Presentation transcript:

ONANA, Bissaya Axel Didier An Empirical Testing of Capital Asset Pricing Model on the Nigerian Stock Exchange By ONANA, Bissaya Axel Didier March, 2017

Capital Asset Pricing Model what is all about? Assumptions The Market is efficient Investors are risk-averse Homogeneous expectations Single time period Risk-free rate

Key Features of the Model The expected return of an asset strictly depends on the systematic risk (market risk) The expected return and the risk are linearly related No other type of risk can influence the return of asset

Problem of the Study Despite the worldwide reputation of CAPM, the empirical literature shows mixed evidence about the ability of the model to explain the movement of the asset’s return. Therefore, it’s crucial to make an attempt to see if the market risk can explain the fluctuation of the stock returns in the Nigerian stock market

Aim of the Research To test the validity of the Capital Asset Pricing Model as far as the Nigeria Stock Exchange is concerned

Research Methodology Ex post hypothetico-deductive design Sample size is 50 firms Time frame 1985-2015 Hamada Equation to estimate Beta LB=UB[1+(1-T)(DR)] Ordinary Least Square Regression analysis Autocorrelation Conditional Heteroskedasticity

Findings There is no significant relationship between the realized return and market risk The expected return and market risk are linearly related The non-systematic risk affect the expected return

Conclusion The Capital Asset Pricing Model is not valid in the Nigeria Stock Market. Even if the CAPM does not hold in the Nigeria Stock Exchange, the study does not provide evidence in support of any alternative model

Recommendations Investors and portfolio managers ought to enhance the strategies they use in streamlining their portfolios as the market altogether remunerates market risk. Firms and ventures must be proactive in differentiating non-efficient risk and innovatively reacting to market risk. Viable financial approaches are required to keep on enhancing the sovereign risk status of the nation and in addition that of the organizations and businesses.