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CAPM & Extension

CAPM & Extension. Prepared for Econometrics By Prof. Keunkwan Ryu ISER & Seoul National University. CAPM and its Extension. CAPM : Single factor model of return (time series regression)

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CAPM & Extension

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  1. CAPM & Extension Prepared for Econometrics By Prof. Keunkwan Ryu ISER & Seoul National University

  2. CAPM and its Extension • CAPM : Single factor model of return (time series regression) • Fama & French(1992) : Addition of Size and Book to Market ratio to explain cross-sectional variation of returns.

  3. Estimation of CAPM  • OLS of Individual Stock Returns on the Market Portfolio Return(Market Portfolio: KOSPI) using monthly time series data. • Data: Monthly return data(1999. 2.-2001. 12.)

  4. Other Estimation Results

  5. Testing  = 1 (I)

  6. Testing  = 1 (II)

  7. Cross-sectional Regressionsin Fama & French (1992)

  8. c.f. Time averages of the cross-sectional coefficient estimates in Fama & French (1992)

  9. Time averages of the cross-sectional coefficient estimates in Korea (15 stocks)

  10. Pooled Regressions (15 stocks on KSE, 1999. 2.-2001. 12.)

  11. Estimation Results Within parentheses are t-values.

  12. Remarks • Fama & French (1992) “The Cross-Section of Expected Stock Returns,” Journal of Finance all nonfinancial firms, 336 monthly data c.f. Korean data: 15 firms, 35 monthly data • In Korea, no evidence of small firm effect (No size effect is significantly negative) • In Korea, no favorable market reaction to the undervalued stocks, that is those stocks with high book to market ratio. (No B/M ratio is significantly positive)

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