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Single Beta and Dual Beta Models: A Testing of CAPM on Condition of Market Overreactions

Author

Listed:
  • Ferikawita M. Sembiring

    (Jenderal Achmad Yani University, Indonesia. Author-2-Name: Sulaeman Rahman Author-2-Workplace-Name: Padjadjaran University, Bandung Indonesia. Author-3-Name: Nury Effendi Author-3-Workplace-Name: Padjadjaran University, Bandung Indonesia. Author-4-Name: Rachmat Sudarsono Author-4-Workplace-Name: Padjadjaran University, Bandung Indonesia.)

Abstract

"Objective � A previous study conducted by the same authors found that the conditions of market overreaction occurred in Indonesia and the market factor in CAPM, or a single beta, is able to explain the portfolio returns. As a continuation of that study, we now use the concept of conditional CAPM, or a dual beta, to test whether the performance of the dual beta can outperform the single beta. Methodology/Technique � The research uses the stocks of non-financial sector company on the Indonesian Stock Exchange during the period between July 2005 and December 2015, which have been divided into two portfolios; the winner and the loser. The conditional CAPM is applied by separating the market into upstream markets and downstream markets, so the dual beta model can be formulated. Findings � The results are consistent with the findings of Pettengill et al. (1995). The results of a single beta test do not comply with the conditions required in the CAPM model and this can be corrected through conditional beta testing that includes the testing on the up beta, down beta, and the dual beta. Novelty � The dual beta model can explain the returns of the portfolio in accordance with the expected results in CAPM testing. The explanation by using the dual beta model is more accurate and more successful than the single beta model."

Suggested Citation

  • Ferikawita M. Sembiring, 2017. "Single Beta and Dual Beta Models: A Testing of CAPM on Condition of Market Overreactions," GATR Journals jfbr128, Global Academy of Training and Research (GATR) Enterprise.
    • Handle: RePEc:gtr:gatrjs:jfbr128
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    References listed on IDEAS

    as
    1. Reinganum, Marc R., 1981. "A New Empirical Perspective on the CAPM," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(4), pages 439-462, November.
    2. Fletcher, Jonathan, 2000. "On the conditional relationship between beta and return in international stock returns," International Review of Financial Analysis, Elsevier, vol. 9(3), pages 235-245.
    3. Fabozzi, Frank J & Francis, Jack Clark, 1977. "Stability Tests for Alphas and Betas over Bull and Bear Market Conditions," Journal of Finance, American Finance Association, vol. 32(4), pages 1093-1099, September.
    4. Ravinder K. Bhardwaj & LeRoy D. Brooks, 1993. "Dual Betas From Bull And Bear Markets: Reversal Of The Size Effect," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 16(4), pages 269-283, December.
    5. Bhardwaj, Ravinder K & Brooks, LeRoy D, 1993. "Dual Betas from Bull and Bear Markets: Reversal of the Size Effect," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 16(4), pages 269-283, Winter.
    6. Glenn Pettengill & Sridhar Sundaram & Ike Mathur, 2002. "Payment For Risk: Constant Beta Vs. Dual‐Beta Models," The Financial Review, Eastern Finance Association, vol. 37(2), pages 123-135, May.
    7. Pettengill, Glenn N. & Sundaram, Sridhar & Mathur, Ike, 1995. "The Conditional Relation between Beta and Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(1), pages 101-116, March.
    8. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    9. Chopra, Navin & Lakonishok, Josef & Ritter, Jay R., 1992. "Measuring abnormal performance : Do stocks overreact?," Journal of Financial Economics, Elsevier, vol. 31(2), pages 235-268, April.
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    Cited by:

    1. Ferikawita M. Sembiring, 2018. "Three-Factor and Five-Factor Models: Implementation of Fama and French Model on Market Overreaction Conditions," GATR Journals jfbr150, Global Academy of Training and Research (GATR) Enterprise.

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    More about this item

    Keywords

    Conditional CAPM; Dual Beta; Loser Portfolio; Winner Portfolio.;
    All these keywords.

    JEL classification:

    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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