Application of Capital Asset Pricing (CAPM) and Arbitrage Pricing Theory (APT) Models in Athens Exchange Stock Market

Term Paper , 2007 , 91 Pages , Grade: 90.0%

Business economics - Investment and Finance

This paper examines the estimating and forecasting performance of the different and various Generalized Autoregressive Conditional Heteroscedasticity-GARCH’s models in relation to Capital Asste Pricing Model (CAPM) model. We apply the CAPM model with ordinary least squares (OLS) method to investigate if an ARCH (Autoregressive Conditional Heteroscedasticity) is presented and we are trying to decide and to analyze which GARCH model is the most appropriate and the best fitted for the financial time series that we have chosen. We apply CAPM model in the financial time series of the share prices of Technology-Software Sector in Athens Exchange stock market for the period January 1st of 2002 to October 30th of 2007 for the enterprises “Unibrain” “MLS Informatics” and “Dionic” respectively , from April 2nd of 2002 to 30th October of 2007 for the enterprise “Compucon”, from August 2nd of 2002 to 30th October of 2007 for the enterprise “Centric”, and finally from February 2nd of 2004 to 30th October of 2007 for the enterprise “Ilyda”. Additionally, we apply roiling regressions, where the full programming routines in EVIEWS and MATLAB are described detailed. We conclude that the slope β coefficient of CAPM model is not constant through the time period of rolling regressions we apply. In the final part we examine a simple Arbitrage Pricing Theory (APT) model.

Inhaltsverzeichnis (Table of Contents)

• Abstract
• Introduction
• Section 1
• Section 2
• Section 3
• Section 4
• Section 5
• Conclussions
• References

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This paper aims to examine the performance of different Generalized Autoregressive Conditional Heteroscedasticity (GARCH) models in relation to the Capital Asset Pricing Model (CAPM). The study utilizes the CAPM model with ordinary least squares (OLS) to investigate the presence of ARCH effects and determine the most appropriate GARCH model for the chosen financial time series.

• Performance of GARCH models in relation to the CAPM
• Application of the CAPM model to financial time series
• Analysis of ARCH effects in the chosen time series
• Determination of the best-fitted GARCH model
• Investigation of the constancy of the CAPM model's Beta coefficient over time

Zusammenfassung der Kapitel (Chapter Summaries)

• Abstract: This chapter provides a concise overview of the paper's objectives, methodology, and key findings.
• Introduction: This chapter introduces the CAPM model and its limitations, outlining the purpose of the study and the structure of the paper.
• Section 1: This chapter presents the theoretical foundations of the CAPM model and discusses the characteristics of three major GARCH models: EGARCH, GJR, and GARCH-M, along with the ARCH component model.
• Section 2: This chapter provides a statistical summary of the chosen time series, examining their leptokurtosis, general behavior, and stationarity. It also tests for the presence of ARCH effects in the time series.
• Section 3: This chapter applies the ARCH methodology to the CAPM model for each price index, investigating the presence of ARCH effects and estimating the specific model if they are absent. It tests for autocorrelation of the disturbance term and examines the constancy of the Beta coefficient using rolling regressions.
• Section 4: This chapter builds upon Section 3 by applying estimations of the previously mentioned GARCH models. If ARCH effects are found in Section 3, rolling regressions are applied to the GARCH models as well.
• Section 5: This chapter discusses and presents a simple APT model with cross-sectional regression, comparing it to a CAPM model estimated with cross-sectional regression.

Schlüsselwörter (Keywords)

This paper focuses on the Capital Asset Pricing Model (CAPM), Generalized Autoregressive Conditional Heteroscedasticity (GARCH) models, ARCH effects, financial time series analysis, rolling regressions, Arbitrage Pricing Theory (APT), and the Athens Exchange stock market.

• Grade: 90.0%
• Author: Eleftherios Giovanis (Author)
• Publication Year: 2007
• Pages: 91
• Catalog Number: V146639
• ISBN (eBook): 9783640576791
• ISBN (Book): 9783640576593
• Language: English
• Tags: stock returns, EVIEWS, MATLAB, rolling regressions, CAPM, Arbitrage Pricing Theory