Document Type
Conference Item
Publication Date
11-1-2009
Abstract
Of late, concerns are raised against the application of the classical one-factor CAPM in emerging markets. Adopting some of the emerging market models reviewed in Pereiro (2001), together with the two-factor CAPM models proposed in this study, we make comparison between systematic and downside risk measures to estimate the cost of equity of Malaysian firms over 2000-2007. Overall, our results are consistent with Estrada (2000, 2001)’s findings which support downside risk measures over standard risk measures. Based on standard model selection criteria we find that two-factor downside betas have the highest explanatory power on actual stock returns, compared to single-factor models that consider only either local or global risk factor. The cost of equity for Malaysian firms calculated based on the two-factor downside betas have an average value of 11.42%. The Adjusted Local CAPM (ALCAPM) gives an average cost of equity value of 10.34%. If Malaysian investors have used the ALCAPM, they would have underestimated the firm’s cost of equity by an average of 108 basis points.
Keywords
CAPM, Cost of equity, Downside risk, Firm
Divisions
FacultyofEconomicsAdministration
Event Title
International Conference on Business and Management Research
Event Location
Bali, Indonesia
Event Dates
22-24 Nov 2009
Event Type
conference