Efficiency on the Budapest Stock Exchange : Applicability of the BUX index in CAPM equations

Absztrakt (kivonat)

Asset pricing models play a key role in our financial system both as investment and valuation guidelines. One of the most widely-used asset pricing model nowadays is the Capital Asset Pricing Model or CAPM, either in its original Sharpe-Lintner or its modfied Black CAPM form. The Sharpe-Lintner CAPM has been widely tested in several international and national stock markets and most frequently has been found to be imprecise or incorrect; nevertheless it is still very popular amongst professionals (for instance for valuation purposes) mainly due to its simplicity. This study does not intend to investigate the validity of the CAPM, which many critiques reveal is a tedious (or infeasible) task requiring the dfinition of a complete market portfolio. Instead, this research focuses on the possible validity of the CAPM - and thus the validity of its utilization - on the Budapest Stock Exchange. Particularly, this paper investigates the Markowitz ficiency of the main index of the Budapest Stock Exchange, the BUX Index in the asset universe of the Budapest Stock Exchange's common stocks between October, 1995 and October, 2013. The methodology employed is that of Fama and MacBeth (1973) (time-series tests excluded) and the empirical results show that we can reject the ficiency of the BUX Index, as the expected market premium is signficantly negative in the investigated period. On the other hand, the cross-sectional tests also reveal that non-beta-related and beta-squared (non-linear beta-related) factors do not play a significant role in determining expected returns; nonetheless, this cannot save the eficiency of the defined market portfolio in our asset universe. Practical consequences of these findings include that the usage of the BUX Index in CAPM calculations related to Budapest Stock Exchange common stocks is faulty and thus should be avoided.