6 months, beta significantly explains average monthly stock returns on the ZSE. Tests to validate the CAPM reject its validity for the ZSE however, primarily due to liquidity and skewness anomalies. We nevertheless fail to detect any size effects. There is encouraging evidence to suggest that the CAPM performs reasonably well in predicting average monthly returns over prediction horizons of between 3 and 6 months. We recommend that investors and analysts must exercise extreme caution in applying the CAPM. Furthermore, we discourage strategies based on the existence of a size premium on the ZSE. Instead, investors may consider neglected and negatively skewed stocks, albeit over appropriate horizons. Further research on other African Stock Markets will help verify if the optimal performance range of the CAPM is indeed 3-6 months. Development of standard continental proxy market portfolios will also improve the estimation of betas and enhance results of cross-country tests of the CAPM."> 6 months, beta significantly explains average monthly stock returns on the ZSE. Tests to validate the CAPM reject its validity for the ZSE however, primarily due to liquidity and skewness anomalies. We nevertheless fail to detect any size effects. There is encouraging evidence to suggest that the CAPM performs reasonably well in predicting average monthly returns over prediction horizons of between 3 and 6 months. We recommend that investors and analysts must exercise extreme caution in applying the CAPM. Furthermore, we discourage strategies based on the existence of a size premium on the ZSE. Instead, investors may consider neglected and negatively skewed stocks, albeit over appropriate horizons. Further research on other African Stock Markets will help verify if the optimal performance range of the CAPM is indeed 3-6 months. Development of standard continental proxy market portfolios will also improve the estimation of betas and enhance results of cross-country tests of the CAPM.">
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An Empirical Test of the Validity of the Capital Asset Pricing Model on the Zimbabwe Stock Exchange

Author

Listed:
  • Melody Nyangara

    (Department of Finance, National University of Science and Technology, Bulawayo, Zimbabwe)

  • Davis Nyangara

    (Department of Finance, National University of Science and Technology, Bulawayo, Zimbabwe)

  • Godfrey Ndlovu

    (Department of Finance, National University of Science and Technology, Bulawayo, Zimbabwe)

  • Takawira Tyavambiza

    (Agricultural Bank of Zimbabwe Limited, Zimbabwe)

Abstract
We test the empirical validity of the capital asset pricing model (CAPM) on the Zimbabwe Stock Exchange (ZSE) using cross-sectional stock returns on 31 stocks listed on the ZSE between March 2009 and February 2014. We conclude that, although the explanatory power of beta tends to fall rapidly for prediction horizons >6 months, beta significantly explains average monthly stock returns on the ZSE. Tests to validate the CAPM reject its validity for the ZSE however, primarily due to liquidity and skewness anomalies. We nevertheless fail to detect any size effects. There is encouraging evidence to suggest that the CAPM performs reasonably well in predicting average monthly returns over prediction horizons of between 3 and 6 months. We recommend that investors and analysts must exercise extreme caution in applying the CAPM. Furthermore, we discourage strategies based on the existence of a size premium on the ZSE. Instead, investors may consider neglected and negatively skewed stocks, albeit over appropriate horizons. Further research on other African Stock Markets will help verify if the optimal performance range of the CAPM is indeed 3-6 months. Development of standard continental proxy market portfolios will also improve the estimation of betas and enhance results of cross-country tests of the CAPM.

Suggested Citation

  • Melody Nyangara & Davis Nyangara & Godfrey Ndlovu & Takawira Tyavambiza, 2016. "An Empirical Test of the Validity of the Capital Asset Pricing Model on the Zimbabwe Stock Exchange," International Journal of Economics and Financial Issues, Econjournals, vol. 6(2), pages 365-379.
    • Handle: RePEc:eco:journ1:2016-02-1
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    References listed on IDEAS

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    1. Amenawo Ikpa Offiong & Hodo Bassey Riman & Helen Walter Mboto & Eyo Itam Eyo & Diana Gembom Punah, 2020. "Capital Asset Pricing Model (CAPM) and the Douala Stock Exchange," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(5), pages 191-198, October.
    2. Prince Hikouatcha & Arsène Aurelien Njamen Kengdo & Hans Patrick Bidias Menik & Pierre Ghislain Tchoffo Tioyem & Tii Njivukuh Nchofoung, 2023. "Microstructure and asset pricing: An insight on African frontier stock markets," Bulletin of Economic Research, Wiley Blackwell, vol. 75(4), pages 944-987, October.
    3. Georgas Janata, 2016. "Validity of the Capital Asset Pricing Model (CAPM) for Securities Trading at the Nairobi Securities Exchange (NSE)," Business and Management Research, Business and Management Research, Sciedu Press, vol. 5(4), pages 62-72, December.

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    More about this item

    Keywords

    Capital Asset Pricing Model; Beta; Capital Asset Pricing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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