Introduction to CAPM: Advantages, Disadvantages and Alternatives

Research Article
Open access

Introduction to CAPM: Advantages, Disadvantages and Alternatives

Wang Liao 1*
  • 1 Sichuan University    
  • *corresponding author liaowang@stu.scu.edu.cn
Published on 13 September 2023 | https://doi.org/10.54254/2754-1169/23/20230397
AEMPS Vol.23
ISSN (Print): 2754-1177
ISSN (Online): 2754-1169
ISBN (Print): 978-1-915371-89-8
ISBN (Online): 978-1-915371-90-4

Abstract

Capital Asset Pricing Model (CAPM) is a widely used financial model for asset pricing. This paper summarizes the advantages of CAPM, highlighting its applicability to most developed countries. Based on academic research, this paper also discusses the limitations of the CAPM model, including issues with its assumptions and its limited suitability for developing countries. In the end, Alternative solutions are discussed, including finding other financial models to replace or improve the CAPM. However, through the summary, this paper finds the current financial models are relatively independent and most of them have some shortcomings in the assumption. It is difficult to find a perfect model. Therefore, the conclusion is that the future research direction should be to integrate a summative financial model to integrate the advantages of each model to help future financial analysis in both developed and developing countries.

Keywords:

CAPM, FF3F, APT, CAPM-based models

Liao,W. (2023). Introduction to CAPM: Advantages, Disadvantages and Alternatives. Advances in Economics, Management and Political Sciences,23,331-335.
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References

[1]. Teixeira, N., Silva, M., Silva, R. V. D., Pereira, L., Silva, S. V. D.: CAPM model applied to the Portuguese stock market. International Journal of Electronic Finance 12(1), 55-63 (2023).

[2]. Pei, Y.S., Dong, H.S.: the CAPM Based on China's Stock Market Herding Behavior. Economic Research, 64-70 (2002).

[3]. Min, S.: Research on the expected return on Assets of energy industry enterprises based on CAPM model. Coal Economic Research 42(06), 12-17 (2022).

[4]. Vergara-Fernández, M., Heilmann, C., Szymanowska, M.: Describing model relations: The case of the capital asset pricing model (CAPM) family in financial economics. Studies in History and Philosophy of Science 97, 91-100 (2023).

[5]. Fama, E. F., French, K. R.: The CAPM: Theory and evidence. Center for Research in Security Prices (CRSP). University of Chicago, Working Paper, (550) (2003).

[6]. Hur, S. K., Chung, C. Y.: Revisiting CAPM betas in an incomplete market: Evidence from the Korean stock market. Finance research letters 21, 241-248 (2017).

[7]. Long, H., Jiang, Y., Zhu, Y.: Idiosyncratic tail risk and expected stock returns: Evidence from the Chinese stock markets. Finance Research Letters 24, 129-136 (2018).

[8]. Duarte, F., Rosa, C.: The equity risk premium: a review of models. Economic Policy Review (2), 39-57 (2015).

[9]. Ayub, U., Kausar, S., Noreen, U., Zakaria, M., Jadoon, I. A.: Downside risk-based six-factor capital asset pricing model (CAPM): A new paradigm in asset pricing. Sustainability 12(17), 6756 (2020).

[10]. Kablan, S., Guesmi, K.: Financial Integration and Japanese Stock market Performance. Economics Bulletin 31(1), 104-134 (2016).

[11]. He, Z., O'Connor, F., Thijssen, J.: Is gold a Sometime Safe Haven or an Always Hedge for equity investors? A Markov-Switching CAPM approach for US and UK stock indices. International Review of Financial Analysis 60, 30-37 (2018).

[12]. Chen, Z.: The Applicability of Classic Capital Asset Pricing Model in Chinese Stock Market. International Conference on Financial Innovation and Economic Development (ICFIED), 1213-1218 (2022).

[13]. Tao, R., Shao, G.L.: Test of Shanghai Stock Market by CAPM model. JOURNAL OF APPLIED STATISTICS AND MANAGEMENT 19(4), 12-17 (2000).

[14]. Rong B.G., Yu, H.L.: Empirical tests of CAPM on Shenzhen’s stock market. Journal of Anhui University Natural Science Edition 31(2), 17-20 (2007).

[15]. Yuan, H.L., Xian, B.C.: Capital asset pricing Model and three factor model on the oil industry stock yield evaluation. World Petroleum Industry (05),46-53 (2022).

[16]. Barberis, N., Greenwood, R., Jin, L., Shleifer, A.: X-CAPM: An extrapolative capital asset pricing model. Journal of financial economics 115(1), 1-24 (2015).

[17]. Estrada J.: Mean-semivariance behavior (II): the D-CAPM. Available at SSRN 307242 (2003).

Cite this article

Liao,W. (2023). Introduction to CAPM: Advantages, Disadvantages and Alternatives. Advances in Economics, Management and Political Sciences,23,331-335.

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About volume

Volume title: Proceedings of the 2023 International Conference on Management Research and Economic Development

ISBN：978-1-915371-89-8(Print) / 978-1-915371-90-4(Online)
Editor：Javier Cifuentes-Faura, Canh Thien Dang
Conference website: https://2023.icmred.org/
Conference date: 28 April 2023
Series: Advances in Economics, Management and Political Sciences
Volume number: Vol.23
ISSN：2754-1169(Print) / 2754-1177(Online)

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References

[1]. Teixeira, N., Silva, M., Silva, R. V. D., Pereira, L., Silva, S. V. D.: CAPM model applied to the Portuguese stock market. International Journal of Electronic Finance 12(1), 55-63 (2023).

[2]. Pei, Y.S., Dong, H.S.: the CAPM Based on China's Stock Market Herding Behavior. Economic Research, 64-70 (2002).

[3]. Min, S.: Research on the expected return on Assets of energy industry enterprises based on CAPM model. Coal Economic Research 42(06), 12-17 (2022).

[4]. Vergara-Fernández, M., Heilmann, C., Szymanowska, M.: Describing model relations: The case of the capital asset pricing model (CAPM) family in financial economics. Studies in History and Philosophy of Science 97, 91-100 (2023).

[5]. Fama, E. F., French, K. R.: The CAPM: Theory and evidence. Center for Research in Security Prices (CRSP). University of Chicago, Working Paper, (550) (2003).

[6]. Hur, S. K., Chung, C. Y.: Revisiting CAPM betas in an incomplete market: Evidence from the Korean stock market. Finance research letters 21, 241-248 (2017).

[7]. Long, H., Jiang, Y., Zhu, Y.: Idiosyncratic tail risk and expected stock returns: Evidence from the Chinese stock markets. Finance Research Letters 24, 129-136 (2018).

[8]. Duarte, F., Rosa, C.: The equity risk premium: a review of models. Economic Policy Review (2), 39-57 (2015).

[9]. Ayub, U., Kausar, S., Noreen, U., Zakaria, M., Jadoon, I. A.: Downside risk-based six-factor capital asset pricing model (CAPM): A new paradigm in asset pricing. Sustainability 12(17), 6756 (2020).

[10]. Kablan, S., Guesmi, K.: Financial Integration and Japanese Stock market Performance. Economics Bulletin 31(1), 104-134 (2016).

[11]. He, Z., O'Connor, F., Thijssen, J.: Is gold a Sometime Safe Haven or an Always Hedge for equity investors? A Markov-Switching CAPM approach for US and UK stock indices. International Review of Financial Analysis 60, 30-37 (2018).

[12]. Chen, Z.: The Applicability of Classic Capital Asset Pricing Model in Chinese Stock Market. International Conference on Financial Innovation and Economic Development (ICFIED), 1213-1218 (2022).

[13]. Tao, R., Shao, G.L.: Test of Shanghai Stock Market by CAPM model. JOURNAL OF APPLIED STATISTICS AND MANAGEMENT 19(4), 12-17 (2000).

[14]. Rong B.G., Yu, H.L.: Empirical tests of CAPM on Shenzhen’s stock market. Journal of Anhui University Natural Science Edition 31(2), 17-20 (2007).

[15]. Yuan, H.L., Xian, B.C.: Capital asset pricing Model and three factor model on the oil industry stock yield evaluation. World Petroleum Industry (05),46-53 (2022).

[16]. Barberis, N., Greenwood, R., Jin, L., Shleifer, A.: X-CAPM: An extrapolative capital asset pricing model. Journal of financial economics 115(1), 1-24 (2015).

[17]. Estrada J.: Mean-semivariance behavior (II): the D-CAPM. Available at SSRN 307242 (2003).

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