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CAPM Model and Beta

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CAPM Model and Beta

By Hao Sun

- Financial and Food Stocks from S&P100 Index
- Include: BAC, BK, GS, JPM, MS, NYX, WFC, HNZ, KO, KFT, PEP
- Also used S&P100 Futures as the market index for CAPM model

- , where .
- , where ,
- CAPM: , where .
- So, .

- We construct a portfolio with equal weight of and , where is the return on stock i, and is the return on S&P100 Index.

- Similarly,
- We have:
- Since Bi-power measure is jump-robust, we can find the contribution of jump by subtracting from .

- Jump Contributions are not significant to beta.
- In other words, market systematic risks are not affected jumps in prices of individual stocks.
- So CAPM model will not be affected by outliers in returns as some papers claim (Martin, Simin, 2003)
- During periods of financial stress, Financial firms tend to have a beta above 1.
- On the contrary, the beta of Food&Beverage Providers remain low during financial stress. (Some even decrease)
- In general, financial firms have higher beta.