On the stability of the CAPM before and after the financial crisis: Panel evidence from the Johannesburg Securities Exchange

Jan 1, 2017·

Paul Alagidede

Nikolaos Koutounidis

Theodore Panagiotidis

· 2 min read

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CAPM stability analysis

Abstract

This paper examines the stability of the Capital Asset Pricing Model (CAPM) using panel data from the Johannesburg Securities Exchange. We investigate whether the 2008 financial crisis affected the validity of CAPM predictions by comparing pre-crisis and post-crisis periods. Using a comprehensive dataset of South African equities, we employ panel regression techniques to test the stability of beta coefficients and the risk-return relationship. Our findings suggest significant structural breaks in the CAPM relationship around the financial crisis period, with implications for portfolio management and asset pricing in emerging markets.

Type

Journal article

Publication

African Review of Economics and Finance, 9(1)

Note: This publication is based on my Bachelor’s thesis research from the University of Macedonia. While it represents an early stage of my academic development, it demonstrates foundational skills in empirical finance and panel data analysis.

This research investigates the stability of one of the most fundamental models in finance—the Capital Asset Pricing Model (CAPM)—in the context of the 2008 global financial crisis. Using data from the Johannesburg Securities Exchange, we provide evidence on how major financial disruptions affect core asset pricing relationships.

Key Contributions

Crisis Impact Assessment: First comprehensive study of CAPM stability around the 2008 crisis for South African markets
Panel Data Approach: Employs robust panel regression techniques to test model stability
Emerging Market Focus: Provides insights specific to emerging market dynamics
Structural Break Analysis: Identifies significant changes in risk-return relationships

Methodology

Data: Comprehensive dataset from Johannesburg Securities Exchange
Period: Pre-crisis (2005-2007) and post-crisis (2009-2011) comparison
Method: Panel regression with structural break tests
Sample: Broad cross-section of South African equities

Findings

The analysis reveals significant structural breaks in the CAPM relationship, suggesting that the financial crisis fundamentally altered risk-return dynamics in the South African market. These findings have important implications for:

Portfolio management strategies
Risk assessment methodologies
Asset pricing in emerging markets
Financial regulation and oversight

This work was conducted during my undergraduate studies and represents my first foray into empirical finance research.

Last updated on Jan 1, 2017