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Unformatted text preview: Munich Personal RePEc Archive Risk and return nexus in Malaysian stock market: Empirical evidence from CAPM Md Isa, Abu Hassan, Puah, Chin-Hong and Yong, Ying-Kiu Faculty of Economics and Business, Universiti Malaysia Sarawak, Faculty of Economics and Business, Universiti Malaysia Sarawak, Faculty of Economics and Business, Universiti Malaysia Sarawak 2008 Online at http://mpra.ub.uni-muenchen.de/12355/ MPRA Paper No. 12355, posted 26. June 2009 / 12:42 1 Risk and Return Nexus in Malaysian Stock Market: Empirical Evidence from CAPM Abu Hassan Md Isa, Chin-Hong Puah : and Ying-Kiu Yong Faculty of Economics and Business, Universiti Malaysia Sarawak, 94300 Kota Samarahan, Sarawak, Malaysia. Abstract This paper examines the applicability of CAPM in explaining the risk-return relation in the Malaysian stock market for the period of January 1995 to December 2006. The test, using linear regression method, was carried out on four models: the standard CAPM model with constant beta (Model I), the standard CAPM model with time-varying beta (Model II), the CAPM model conditional on segregating positive and negative market risk premiums with constant beta (Model III), as well as the CAPM model conditional on segregating positive and negative market risk premiums with time varying beta (Model IV). Empirical results indicate that both the standard CAPM models (Model I and Model II) are statistically insignificant. However, the CAPM models conditional on segregating positive and negative market risk premiums (Model III and Model IV) are statistically significant. In addition, this study also discovers that time varying beta provides better explanatory power. Keywords: Stock market, CAPM, time-varying beta JEL Classification: G10, G12, C20 1. Introduction Stock market plays an important role in stimulating economic growth of a country. It helps to channel fund from individuals or firms without investment opportunities to firms who have them and thus improves the country’s economic efficiency. It is the lifeblood of the economy of a nation that concerns individuals, firms as well as government. However, stock market is a volatile financial market, in which various factors can affect the return that investors can gain from investing in stocks. The uncertainty of reward from stock market is translated into risks that investors have to bear for investing in stocks. Broadly, risks exist in the stock market can be categorized into unsystematic risk which is firm specific as a result of company specific factors and systematic risk which is market related risk in consequence of market related factors. According to Markowitz Portfolio Theory (Markowitz, 1959), unsystematic risk can be diversified away through diversification of portfolio and thus the capital markets will not reward investors for bearing this type of risk. Instead, the capital markets will only reward investors for bearing systematic risk that cannot be eliminated through diversification....
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