The Validity of CAPM: A Critical and Conclusive Study with Empirical Evidence from the UK Security Market

DOI

10.2991/assehr.k.211209.367How to use a DOI?

Keywords

CAPM; asset pricing model; two-pass regression; empirical evidence

Abstract

CAPM is a fundamental asset pricing model that has complex viewpoints from scholars. The validity of CAPM is essential for the market participants, as many of their decisions will be based on the securities’ estimated returns. This paper aims to give a more comprehensive discussion of CAPM and test its application in real life. By reviewing the developments and showing the empirical evidence, the two-pass regression results from both the stocks and funds from the UK’s capital market prove that inconsistencies occur. Significant alphas may pose arbitrage opportunities for the market participants to exploit, while the other differences are statistically insignificant. The discoveries imply that generally, CAPM can be a useful tool to price assets and aid decision-making in some cases. However, users should be aware of its unrealistic assumptions and inaccurate predictions. The regression result may be specific due to the choice of country, sample size, industry, security type, and time interval. Previous research has evidenced that CAPM has multiple limitations when applied in the real market, meaning weak validity in pricing assets.

Copyright

© 2021 The Authors. Published by Atlantis Press International B.V.

Open Access

This is an open access article under the CC BY-NC license.

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TY  - CONF
AU  - Siman Peng
PY  - 2021
DA  - 2021/12/15
TI  - The Validity of CAPM: A Critical and Conclusive Study with Empirical Evidence from the UK Security Market
BT  - Proceedings of the 2021 3rd International Conference on Economic Management and Cultural Industry (ICEMCI 2021)
PB  - Atlantis Press
SP  - 2237
EP  - 2243
SN  - 2352-5428
UR  - https://doi.org/10.2991/assehr.k.211209.367
DO  - 10.2991/assehr.k.211209.367
ID  - Peng2021
ER  -