International Journal of Economics and Finance Vol.4, Issue 2, 2015

AN EMPIRICAL TEST OF CAPITAL ASSET PRICING MODEL:EVIDENCE FROM NAIROBI SECURITIES EXCHANGE 2008-2013

AUTHOR:

Fredrick Olanga Wafula

PhD. B.A (Finance)

Jomo Kenya University of Agriculture and Technology

P.O BOX 25141-00100,

Nairobi, Kenya

Telephone number: +254714650428

Email: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

CITATION: Wafula, O. F. (2015). An Empirical Test of Capital Asset Pricing Model: Evidence from Nairobi Securities Exchange 2008-2013. International Journal of Economics and Finance, 4 (1), 17-37.

ABSTRACT

This study surveys the asset pricing characteristics at the Nairobi Securities exchange (NSE), with emphasis on the use and evidence of the Capital Asset Pricing Model (CAPM). This is in order to determine the stock returns and hence enable the estimation of beta coefficients (risk) for the securities listed in this market. The study's objective is to find out whether the CAPM is applied and functions in the Nairobi Security Exchange, which is one of the typical African emerging market. The CAPM with its assumptions offers the ability to predict securities' returns more accurately than common market analysis techniques such as technical and fundamental analysis. Perhaps the most important challenge to the CAPM is the Arbitrage Pricing Model, which is based on the idea that in competitive market financial arbitrage will ensure equilibrium pricing according to risk and return. However using a sample of equity stocks traded on the NSE, the study examined empirically the relationship between returns and beta as CAPM stipulates, over the period from January 2008 to December 2013. The evidence supports the hypothesis that, if the market price the risk variable, then there exist a systematic relationship between the risk variable and average returns. The relationship found is weak with 31.4% of market return explaining a stocks' return. This indicates that CAPM does work in the market but has a low explanatory power as regards to risk on stocks traded in the market. This outcome however, is essential in investment management that involvesmatching stock profiles to determine the most optimal set of assets to include in aportfolio. The findings are also useful in performance and project evaluation where equityis an essential part of a company's corporate financing policy.

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