Journal of Asia Pacific Business Innovation & Technology Management

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1 Journal of Asia Pacific Business Innovation & echnology Management 003 (2013) Contents lists available at JAPBIM Journal of Asia Pacific Business Innovation & echnology Management APBIMS Homepage: he Risk-Return Relationship in Asean-5 Stock Markets: An Empirical Study Using Capital Asset Pricing Model Maraporn Kiwiriyakun hammasat University, 2 Prachan Rd., Bangkok, hailand, ABSRAC By using all assets, the top 100 assets, and 30 ASEAN Stars assets as the regressors, the negative risk premium is explicitly shown in 1997 (financial crisis), 2000 to 2002 (NASDAQ and World rade Center crises), and 2008 (Hamburger crisis). he average risk premium of the SE is the highest, which is approximately 4.9% annually. SGX, KLSE, and PSE are 3.2% to 4.7%, 1.2% to 3.4%, and 0.1% to 1.3% annually, respectively. However, IDX is equal to -0.8% to -7.5% annually. he higher value of the risk premium attracts risk-loving investors but the high volatility of the market is also a cause for concern. PSE has a risk premium close to zero, which is suitable for risk-averse investors. For IDX, the risk premium over the periods indicates a negative value, which is not a feasibly interesting investment. All stock markets are not correlated with Malaysia because the majority shareholder is government funds APBIM Society. All rights reserved. Keywords: Risk-return relationship, ASEAN-5, CAPM, Negative risk premium, Correlation I. INRODUCION Normally, investors always seek higher returns from any investment. hey decide to invest in the stock market only when they get return higher than bank deposits. But the higher return also carries with higher risk. So, investing in the stock market, the investors must bear the risk-return tradeoffs. Changing in global economic conditions provides the significant shocks to the stock markets, making the price volatility occur. So, investors have to ensure that investing in the risky assets, they will be compensated with preferable high returns. Anyway, they also face the equal chance of getting loss. In order to reduce the possibility of getting loss, portfolio management plays an important role in making decision on various combinations of asset s risk and return. By 2015, there will be a complete integration of leading financial market from ASEAN called ASEAN maraporn.p@gmail.com

2 Exchanges. It is interesting to study the impacts of them on the risk-return relationship in ASEAN-5 stock markets. he ASEAN-5 consists of Singapore Stock Exchange (SGX), Kuala Lumpur Stock Exchange (KLSE), Stock Exchange of hailand (SE), Philippine Stock Exchange (PSE) and Indonesia Stock Exchange (IDX). For the investor side, this paper will help investors evaluate choices and establish the investment decisions of which countries can make their investment greater profits based on the risks they are facing. From the perspective view of investors, the research problem is stated as follows: In the case of Singapore Stock Exchange (SGX), Kuala Lumpur Stock Exchange (KLSE), Stock Exchange of hailand (SE), Philippine Stock Exchange (PSE) and Indonesia Stock Exchange (IDX), whether the risk premiums of five stock markets during the period of January 1990 to July 2012 have the same pattern and tend to converge. II. MEHODOLOGY his paper proposes an evaluation framework which utilizes the CAPM set theory to interpret the relationship between the returns and risks of individual stocks. Additional factors are excluded as stated in the framework of the study. he volatility of stock price is determined by the movement of stock price over the period of interest. Price changes will affect risk level and volatility and the returns of assets. he expected return of the individual assets can be written as: E( R ) R [ E( R ) R ] (1) i f i m f where ER ( i ) is the expected return of asset I, R f is the return of risk-free asset, E( R m ) is the expected return of stock market and i is the systematic risk of asset i. his model assumes that assets with the same risk should have the same expected rate of return, which implies that the prices of the assets in the capital market are adjusted until the risks are equivalent to the expected return. he co-variance of the return of asset and the market return measure the risk of the asset. hese scenario benefits investors in evaluating whether an asset is overpriced or underpriced compared with the initial results of CAPM. hus, the investors will invest only if the returns on the asset investment are greater than the risk-free return. 2.1 Methodology he risk premium of the market ( ) he methodology and procedure are regressed based on Fama-MacBeth (1973) regression, a method used to estimate the parameters of asset pricing models such as the CAPM. A two-stage approach is employed to minimize the variance of betas within the portfolio. he risk premium of the market exposes the relationship of the average excess return of all portfolio j in year and the average betas of all portfolio j in year -1. he cross-sectional regression of the market risk premium (called the average weekly portfolio risk premium ) in each year is given as: 67

3 Pj Pj 1 R β (2) where P j R is the average excess return of portfolio j, j=1,,30 in the current year is the constant coefficient term of stock market in the current year β P j 1 is the average beta of portfolio j, j=1,,30 in the previous year is the stochastic error term of stock market he relationship of excess market index return of ASEAN-5 stock markets o study in 4 stock markets whether they have the impact or the relationship with the stock market remaining one country (left hand side) or not. By following Granger Causality est (1969), the correlated equation is given as: p d h k s (3) set set sin g phil malay indo t t c tc g tg i ti j t j r tr c1 g 1 i1 j1 r1 H : 0 0 g i j r H : 0 a g i j r he equation (3) explains the change in excess index return in which countries can affect and make the excess index return of SE changes. o examine this relationship, if p-value of each coefficient is less than 0.05 (significant level) that means we cannot accept the null hypothesis ( ) and the independent variables (SGX, PSE, KLSE and IDX) have the impact to the SE. III. RESULS 3.1 Results By using all assets in each stock exchange, similar pattern of risk-premiums in the five stock markets emerges; they tend to move in the same direction. According to the results, the statistically significant positive risk premium occurred in 1993, 1998 to 1999, 2003, and 2009 and the negative risk premium occurred in 1997 (Asia financial crisis), 2000 (NASDAQ crisis), and 2008 (Hamburger crisis) for all five stock exchanges. After that two sets were examined; the top 100 stocks in size and the 30 ASEAN Stars stocks. In particular, both positive and negative risk premiums are found and negative risk-premiums are found during the market crises. 68

4 Figure 1. he Risk Premium of the ASEAN-5 Stock Exchanges using all assets in each stock exchange Considering the top 100 assets in 2012, only in hailand and the Philippines are the market risk premium found to be positive, though not significant, whereas negative risk premiums are found in other three stock markets. Using the set of 30 ASEAN Stars stocks, the risk premiums are negative in the year 2012 in the all markets excluding the Stock Exchange of hailand where there is 0.4% per week risk premium. Consistent with the result using the top 100 stocks, the risk premium of the Malaysian exchange index is significantly negative. he average risk premium is examined. he results are similar whether the top 100 assets or 30 Asian Stars assets are used for the regression. hey show that the average risk premium of SE is the highest at approximately 4.9% per year. Singapore and Malaysia have positive average risk premiums at % and % per year, respectively, and both have risk premiums that are higher than the Philippines in excess of 0.1% to 1.3% per year. he average risk premium of the Philippines is close to zero since negative risk premiums can be found in many sub periods. Distinct from other markets, the average risk-premium of Indonesian exchange index is negative having valued of -0.8% to -7.5% per year. For the relationship between these 5 stock markets, a two-way relationship occurs between Indonesia-hailand and Philippines-Singapore. Others are one-way relationship such as Malaysia is correlated with hailand. hailand, Malaysia and Indonesia are correlated with Singapore. hailand and Malaysia are correlated with Philippines and the last one; Philippines and Malaysia are correlated with Indonesia. Figure 2. he Risk Premium of the ASEAN-5 Stock Exchanges using the top 100 highest market capitalizations 69

5 Figure 3. he Risk Premium of the ASEAN-5 Stock Exchanges using 30 ASEAN Stars assets IV. CONCLUSIONS he high-risk portfolios cannot regularly offer the higher return than lower risk portfolios although the period of the market index return is positive. Investing in the stock market will benefit the investors in the long-term and not in the short-run speculation. In periods of negative risk premium, especially during crisis or uncertainty period, investing in the risk-free assets is more secure. Although in the normal situations, the high-risk (high beta) portfolio does not always produce high return, and vice versa. Hence, an investor who expects to receive high excess returns in the current period by investing in risky asset in previous year might possibly miss the expected return. In addition to the market risk premium of each market, the investors should exploit all available information such as the fundamentals of assets, the current economic condition, and the forecast of the government s future policies. REFERENCES [1] Ball, Ray. "Anomalies in Relationships between Securities Yields and Yield Surrogates." Journal of Financial Economics 6, ( ): [2] Bartholdy, Jan, and Peare Paula. "Estimation of expected return: CAPM vs. Fama and French." International Review of Financial Analysis 14(4), (2005): [3] Fama Eugene, and James MacBeth. "Risk, Return, and Equilibrium: Empirical ests." he Journal of Political Economy 81, (1973): [4] Jensen, Michael, Black, Fischer, and Myron Scholes. "he Capital Asset Pricing Model: Some Empirical ests." Studies in the theory of capital markets, New York (1972): [5] Markowitz, Harry. Portfolio Selection: Efficient Diversification of Investments. John Wiley, New York. Cowles Foundation Monograph, (1959) [6] Mike, Ward, and Chris Muller. "Empirical esting of the CAPM on the Johannesburg Stock Exchange." Working Papers Series, (2012) [7] Shum, Wai Cheong, and Gordon ang. "Common Risk Factors in Returns in Asian Emerging Stock Markets." International Business Review 14, no. 6 (2005):