Research Proposal Mark
The proposal looks sketchy and a bit sloppy. The background is poor. There is a very large literature on models explaining stock returns. Motivation is not very clear either. There are other paper dealing with Chinese stock markets. What were their findings? What can you bring extra in comparison to what was done before?
- I) Working Title. (A total of 1 mark available)
Test the Capital Asset Pricing Model in Shenzhen Stock Exchange.
- II) Research Question/Hypothesis. (A total of 10 marks available)
If the CAPM holds, then these hypothesises must holds:
- The intercept of the model should not different with zero significantly.
- There must be a linear relationship between the systematic risk and the return.
- There should not be a relationship between the unsystematic risk and the return.
III) Key Literature. List between 4 and 6 key papers that will form the basis of the research. (Ensure that all papers are referenced correctly – in line with the dissertation guidelines in the 2015/16 handbook.) (A total of 5 marks available)
Bajpai, S. and Sharma, A. (2015). ‘An Empirical Testing of Capital Asset Pricing Model in India’. Procedia – Social and Behavioral Sciences, 189, pp.259-265.
Basu, D. and Chawla, D. (2010). ‘An Empirical Test of CAPM–The Case of Indian Stock Market’. Global Business Review, 11(2), pp.209-220.
Hasan, M., Kamil, A., Mustafa, A. and Baten, M. (2011). ‘A Validity Test of Capital Asset Pricing Model for Dhaka Stock Exchange’. Journal of Applied Sciences, 11(20), pp.3490-3496.
Omran, M. (2007). ‘An analysis of the capital asset pricing model in the Egyptian stock market’. The Quarterly Review of Economics and Finance, 46(5), pp.801-812.
- IV) Background Discussion. (Between one and three pages maximum) (A total of 20 marks available)
The Capital Asset Pricing Model was firstly introduced by Jack Treynor, William Sharpe, John Lintner and Jan Mossin. The CAPM is used to build a relationship between the systematic risk and the return. The CAPM suggests all the unsystematic risk could be diversified by constructing a portfolio. And there is a linear relationship between the systematic risk and the return.
Since the CAPM was introduced, many researchers tested the validation of the model in many exchange markets. However, the most of the exchange markets are in the western countries, for example, French stock market, Istanbul stock market and Spanish stock market. Some researches indicated the model was invalidated because there are some other factors that would influence the return significantly. For example, market to book value, capitalisation and sales could affect the return significantly.
There are rare researches in test the validation of CAPM in China. HeWu and LiuPing tested the validation in Shanghai A-share market. They found that there is not a linear relationship between the unsystematic risk and the return. And the unsystematic risk is not the only factor influencing the return.
This paper would test the validation of the CAPM in Shenzhen stock exchange. Shenzhen stock exchange is one of the three exchanges in China. This paper would be helpful to test the applicable of CAPM in China.
- V) Methodology and data/information requirements. Describe the methodology that will be used, clearly stating how you will attempt to answer your research question. Where appropriate, give details of the data/information required and the sources. (three pages maximum) (Total of 20 marks available)
All the data would be collected from the Shenzhen stock exchange. The data would include 300 non-financial firms during the year 1996 and 2010. The financial firms are not included because the reporting system is different. The firms are chosen according to the code list. One firm would be chosen for every 5 firms. Then, the 300 firms would be the sample.
The model is Rjt = β0 + β1(Rmt) +β2(Rus) +ejt
Rjt is the monthly return of the stock minus the risk free return. The risk free return would be the interest rate of three months deposit.
Rmt would be the average monthly return of all market.
Rus would be the unsystematic risk.
There would be three hypothesises:
- β0 = 0. The intercept should not be different from zero significantly.
- β1 >0. There is a linear relationship between the systematic risk and the return.
- β2=0. There is no relationship between the unsystematic risk and the return.
Then, firstly, β1 would be estimated according to the first five year data. Next, group these stocks into 10 groups while every group would include 30 stocks. Thirdly, calculate the average return of every portfolio for each 5 years. Then, estimate the time series regresstion using the data above. Finally, estimate the cross-section regression.
- VI) Time Plan. Detail your time plan for your dissertation, indicating milestones. (Half a page maximum). (A total of 4 marks available)