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THE EMPIRICAL TESTING OF CAPITAL ASSET PRICING MODEL AND OF THE ARBITRAGE PRICING THEORY. ADRIAN COJOCARU . Market Data. Perio d Octob er 1998 – Septemb er 2002.

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the empirical testing of capital asset pricing model and of the arbitrage pricing theory

THE EMPIRICAL TESTING OF CAPITAL ASSET PRICING MODEL AND OF THE ARBITRAGE PRICING THEORY

ADRIAN

COJOCARU

slide2

Market Data

Period October 1998 – September 2002

SelectionI have selected 20 shares: All from the BET market indexand the rest from the Composite BET index, to insure diversification among different sectors of the economy

End of the month returns, a total of 48 observations

slide5

2.4

4

2.0

3

1.6

1.2

2

0.8

1

0.4

0.0

0

-.4

-.3

-.2

-.1

.0

.1

.2

.3

.4

.5

.6

.7

-1.2

-0.8

-0.4

0.0

0.4

0.8

I

N

X

E

L

J

slide6

CAPM

Sharpe (1964)

APT

Ross (1976)

slide9

„Cross-section”

  • Fama (1973)
  • Chen (1983)

CAPM

slide10

Principal Component Analysis

Correlation Matrix=X’ X

X’ X W = Λ W

P=XW

W’ = W-1

P’ P = W’ X’ X W = W’ W Λ = Λ

X=PW-1

slide16

.07

.06

.05

.04

.03

.02

.01

.00

-.01

5

10

15

20

25

30

35

40

45

RENTMED

RENTCAPM

RENTAPT

slide17

Residue Analysis

A. APT residue analysis

B. CAPM residue analysis