Test of capital asset pricing model in Turkey

The Capital Asset Pricing Model, as the dominating capital market equilibrium model, has been previously tested by various researches in order to define the relationship between risk and return in different capital markets. The empirical test results show the strong support as well as the evidences against the CAPM. The CAPM is the actual issue of many debates in academic research since it continues to be widely used in practical portfolio management. This study has its aim to test the CAPM in order to determine the relationship between beta and returns in the Turkish capital market and the usefullness of beta as a single measure of a security risk. The test of the CAPM in this thesis has been conducted in both traditional and conditional way using the returns on securities listed on Istanbul Stock Exchange. Using the Fama and MacBeth (1973) three-step traditional approach which aims at testing the relationship between beta and return and whether the market risk premium is positive, has given us the result which shows the-insignificant relationship between risk (measured by beta) and return. We believe that the traditional test results have been biased due to the fact that the traditional test does not take into account the condition of positive and negative market excess returns. Therefore, we have splitted the up-market weeks and down-market weeks to conduct the conditional test according to the Pettengill et al. (1995) method. The statistically significant and consistent relationships between beta and returns have been found. The results also indicate that there is an inverse relationship between risk and returns in the periods when the market excess returns are negative. It has been found that the portfolios with higher betas have higher returns when the market risk premium is positive and lower returns when the market risk premium is negative. We have concluded that the systematic conditional relationship exists between beta and returns in the Turkish capital market. The overall evidence in this study indicates that beta is still a useful measure for risk for investors and portfolio managers to make investment decisions but the analysis should be made by means of the conditional model. Keywords: Capital asset pricing model; Market risk premium; Beta and return