An Empirical Analysis Of The Capital Asset Pricing Model In The Chinese Stock Market

Capital asset pricing model (CAPM) mainly studies the relationship between the expectedreturn of securities and risk assets. It describes the relation of the return of the assets andsystem risk in equilibrium. It has taken an important role in capital market of westerncountries since it was born, and it has become the most important theory in financial area. Thevalidity of CAPM has been extensively tested in developed markets especially in theseventies and eighties. Recently, there has been a surge in research on the validity of theCAPM in China stock market, but there is no consistent conclusion.The paper is divided into three sections. First, the domestic and foreign scholars’ researchand the tests about CAPM are summarized in this paper; Second, the theoretical analysis anddetailed derivation of the CAPM model are carried on; Third, the distributed characteristic ofstock returns ratio, weak efficiency of market and the validity of CAPM in the Shanghai stockmarket are carried on empirical tests. In order to test the validity of CAPM in current marketand instruct investors’ investment behavior, the latest data which can reflect the fastdevelopment of market is selected.The statistical nature description, QQ probability plot, autocorrelation test, unit root test aswell as the time series and cross-section regression are carried on in empirical process byusing the EViews6.0. By using Shanghai and Shenzhen’s composite indices, we test thatwhether the stock returns ratio distributes conform to the normal distribution and China’scapital market is valid.The result shows that the Chinese market has satisfied the basicrequirement of CAPM theory. We choose monthly closing price data of Shanghai stockmarket to carry on time series regression and cross-section regression during January2000toDecember2010.Then, we get Shanghai stock market conforms to the linear relationshipwhich CAPM describes, but the linear relationship presents the negative correlation andsystem risk only can reflect limited returns ratio, so market also has other factors which caninfluence returns.Due to negative linear correlation, CAPM can explain that why high risk andlow yield exist in China’s stock market under the economic crisis background.