Testing a Multi-Factor Capital Asset Pricing Model in the Jordanian Stock Market

10 Pages Posted: 11 Jan 2019

Date Written: July 16, 2018

Abstract

A valid and accurate capital asset pricing model (CAPM) may help investors and mutual funds managers in determining expected returns which may lead to increase their profits and community resources. The problem is that the traditional CAPM does not accurately predict the expected rate of return. A more accurate model is needed to help investors in determining the intrinsic price of the financial asset they want to sell or buy. The purpose of this study was to examine the validity of the single-factor CAPM and then develop and test a multifactor CAPM in the Jordanian stock market. The study was informed by the modern portfolio theory and specifically by the single-factor CAPM developed by Sharpe, Lintner, and Mossin. The research questions for the study examined the factors that may explain the variation in the expected rate of return on stocks in the Jordanian stock market and the relationship between the expected rate of return and factors of market return, company size, financial leverage, and operating leverage. A causal-comparative quantitative research design was employed to achieve the purpose of the study by testing the listed companies on the Amman stock exchange (ASE) for the period from 2000 to 2015. Data were collected from the ASE database and analyzed using the multiple regression model and t test. The results revealed that market return, company size, and financial leverage are not predictors of the expected rate of return while operating leverage is a predictor.

Keywords: Capital Asset Pricing Model, Amman Stock Exchange, Financial Leverage, Operating Leverage, Size, Multi-Factor Capital Asset Pricing Model

JEL Classification: G12

Suggested Citation

elshqirat, mohammad and Sharifzadeh, Mohammad M., Testing a Multi-Factor Capital Asset Pricing Model in the Jordanian Stock Market (July 16, 2018). Available at SSRN: https://ssrn.com/abstract=3306991 or http://dx.doi.org/10.2139/ssrn.3306991

Mohammad Elshqirat (Contact Author)

Walden University ( email )

100 Washington Ave S #900
Minneapolis, MN 55401
United States
00962797850903 (Phone)

Mohammad M. Sharifzadeh

Walden University

100 Washington Ave S #900
Minneapolis, MN 55401
United States

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