Erasmus university rotterdam

ABSTRACT

This paper studies the relatively understudied financial markets Egypt, Israel, Morocco and Turkey within the context of several variants of the capital asset pricing model. While there are many studies dealing with equity markets, risk, and returns in emerging economies, only a small number of the examine the countries used in this study. The countries analyzed in this study are emerging markets which have different characteristic compared to established financial markets. The weekly stock returns were investigated by testing different versions of the CAPM, namely the Global CAPM, the Three Moment CAPM, the Four Moment CAPM and the local CAPM. Moreover, the models were tested under differing financial conditions. The study used weekly return from 516 companies listed on the CASE, ISE, TASE, CSE from January 2001 to September 2009.

Ordinary Least Squares (OLS) regression was used to estimate betas. The results do not support the hypothesis that there exists a positive risk return relationship in the emerging markets. The CAPM’s prediction for the intercept is that it should equal zero. The findings of this study do not clearly reject the above hypothesis. In addition, the findings in this study do not clearly support multifactor models. The findings in this study suggests that the CAPM cannot be clearly rejected and shows some merit in emerging markets. Moreover, emerging markets have interesting diversification benefits for international investors.

The model that performs best in emerging markets, depends on which country and which time period is considered. The CAPM models do not perform well in explaining emerging stock markets returns. Interestingly the CAPM performs better during times of financial crisis, in particular the Local CAPM.