Capital asset pricing model and banking sector application in Istanbul Stock Exchange Market (1999-2009)

Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Model are two main asset pricing models that explain capital asset pricing and stock returns in financial theory.The purpose of this study is to search the validity of CAPM, which is also known as the capital market equilibrium model, in our country.In the application of the research daily closing prices of 11 banks stocks that are traded in Istanbul Stock Exchange Market (ISE) are evaluated over the 1999-2009 period.There are two main reasons while choosing banking sector in order to test the validity of CAPM;Banking sector in the ISE is subject to more controls and audits compared to other sectors. Therefore, assets chosen from the banking sector have less possibility of overpricing, underpricng or manipulation risks over the prices. Thus, probability of reflecting the right prices of the assets is higher for the banking sector assets.Secondly, changes in the interest rates are immediately reflected in banking sector, since their affairs based on interest rates banks are highly sensitive to interest rate changes. This sensitivity played a crucial role to consider banking sector assets. In the research performed by Copeland, Koller and Murrin (1994) it is observed that beta of banking sector is the most close to the market beta. Thereupon, it is thought that market representation likelihood of banking sector is high.