SAUDI ARABIAN COMMERCIAL BANKS’ MARKET-RISK SENSITIVITY: CAPM

In studies of the US stock market, (Friend, Granito, & Westerfield,,Lakonishok & Shapiro,, and Fuller & Wong, found there was a significant relationship between non-systematic risk and stock returns. The findings of Corhay, Hawamini, & Michal, in relation to the British stock market were similar. There was a positive relationship between returns and non-systematic risk. In Asian marketsWong & Tan tested the validity of the CAPM in the Singapore Stock Exchange. Their results indicated that the relationship between systematic risk and average return appeared to be linear in beta. However, the sign of the beta risk premium was opposite to that predicted by the CAPM and only a few beta coefficients were significant. Skewness appeared to be significant in two of the five years with individual stocks but with portfolio data, the significant effect of skewness disappeared. Bark used the Fama and MacBeth methodology to test whether the CAPM is applicable to the Korean stock market. A positive trade-off between market risk and return was rejected and other factors such as unique risk were shown to play an important role in pricing risky assets. (Cheung & Wong, 1992)studied the relationships between stock returns and various measures of risk in the Hong Kong Equity Market over the period 1980-89.

On the whole, the application of the CAPM in Hong Kong appeared weak. The market risk was only priced for the year 1984-85. Cheung, Wong, & Ho, performed empirical tests on the relationships between average stock returns and some measures of risk, including skewness, on two of the most important emerging Asian stock markets, Korea and Taiwan. The applicability of the CAPM seemed weak in both markets, particularly in Taiwan. Huang Y. S. also reported an inverse relationship between returns and systematic risk, unique risk, and total risk respectively, in the Taiwan stock market. Click Here
Research into beta is broad and has highlighted a number of limitations particularly in regards to the stability of the beta coefficient over time which has been found in both developed and developing markets(Harvey, 1989; Ferson & Harvey, 1991; Fama & French, 1992; Ferson & Korajczy, 1995; Huang H. C., 2001; Oran & Soytas, 2009; Mollik & Bepari, 2010).Beta instability can be reduced however as both portfolio size and sample duration increases (Fama & Macbeth, 1973; Odabasi, 2000). A paper by Kapusuzoglu, examined the alpha and beta values in the Istanbul Stock Market and highlighted the variability of the beta parameter. It encouraged investors to utilize the CAPM as a supplementary instrument in the process of portfolio information and to avoid relying on it as a sole indicator guiding investment strategy. There appears to be no comprehensive research or analysis based on market betas and alphas, for bank stocks in Saudi Arabia.
In recent years, the CAPM has been attacked as an incomplete model for explaining market pricing behavior, but academics and practitioners cannot agree on a good replacement. Hence, the CAPM remains an important model in practical investment analysis and financial management decision making.

Tags: , , , ,