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Single Beta and Dual Beta Models: A Testing of CAPM on Condition of Market Overreactions

Ferikawita M. Sembiring ()
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Ferikawita M. Sembiring: Jenderal Achmad Yani University, Indonesia. Author-2-Name: Sulaeman Rahman Author-2-Workplace-Name: Padjadjaran University, Bandung Indonesia. Author-3-Name: Nury Effendi Author-3-Workplace-Name: Padjadjaran University, Bandung Indonesia. Author-4-Name: Rachmat Sudarsono Author-4-Workplace-Name: Padjadjaran University, Bandung Indonesia.

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Abstract: "Objective – A previous study conducted by the same authors found that the conditions of market overreaction occurred in Indonesia and the market factor in CAPM, or a single beta, is able to explain the portfolio returns. As a continuation of that study, we now use the concept of conditional CAPM, or a dual beta, to test whether the performance of the dual beta can outperform the single beta. Methodology/Technique – The research uses the stocks of non-financial sector company on the Indonesian Stock Exchange during the period between July 2005 and December 2015, which have been divided into two portfolios; the winner and the loser. The conditional CAPM is applied by separating the market into upstream markets and downstream markets, so the dual beta model can be formulated. Findings – The results are consistent with the findings of Pettengill et al. (1995). The results of a single beta test do not comply with the conditions required in the CAPM model and this can be corrected through conditional beta testing that includes the testing on the up beta, down beta, and the dual beta. Novelty – The dual beta model can explain the returns of the portfolio in accordance with the expected results in CAPM testing. The explanation by using the dual beta model is more accurate and more successful than the single beta model."

Keywords: Conditional CAPM; Dual Beta; Loser Portfolio; Winner Portfolio. (search for similar items in EconPapers)
JEL-codes: J11 G31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk and nep-sea
Date: 2017-06-21
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Published in Journal of Finance and Banking Review, Volume 2, Issue 3

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