An Application of the CAPM and the Three-factor Model in Emerging Markets Asia

Zung Nguyen Buskov & Tayler Huynh

Student thesis: Master thesis


This paper aims to reexamine the validity of the capital asset pricing model (CAPM) and the three-factor model at domestic and regional level in the four leading emerging markets of Asia: China, India, South Korea and Taiwan.
Emerging markets Asia have gained substantial attention from investors due to their increasing role in the global equity market. However, due to the fact that the investment environment is immature and the degree of market ingration is limited, the results of the CAPM and the three-facor model, which are confirmed in developed markets, may differ for emerging markets. Therefore, this paper aims to find a precise asset pricing model to explain the cross-section of expected stock returns in emerging markets Asia. Our dataset consists of 2,825 securities extracted from Datastream, which are tested using the ordinary least squares (OLS) method.
The results of this paper confirms that custom equal-weighted indices should be used as proxies for the market portfolio, when calculating the market return, due to the limited degree of market integration within the region. Based on the robust results of the paper, the domestic CAPM is recommended to be used in China, whereas the domestic three-factor model should be used in India, South Korea and Taiwan.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2017
Number of pages120