Use CAPM to estimate the Beta in basic material sector and whether the global market will affect the basic material sector

Use CAPM to estimate the Beta in basic material sector and whether the global market will affect the basic material sector

Data and variables for CAPM

The period is December 1996 and November 2011, avoiding the extreme volatile period of early development of China stock market.

The global market portfolio is represented by the monthly MSCI world all country index, obtained from Datastream. The MSCI world all country index serves the purpose of a global market portfolio better than the MSCI world index of developed markets. If you want to motivate your study by the international CAPM, you use the excess return of the global market as the explanatory variable.

Datastream has also compiled national market indices and industry indices. I have also obtained China A-share market index as the national market index. If you are interested in motivating your study by the domestic CAPM, you can use the excess return of the national market as the explanatory variable.

I have obtained three A-share sectoral indices as the portfolio indices. The three sectors are sectors of basic material, industry and financial services. You can use any one of the sector indices to investigate if the sectoral portfolio is correctly priced and if the sector is as risky, more or less risky than the world market or the national market. If you are ambitious, you can even compare the tests between sectors.

All the indices are measured in the US dollar. I use the US 30-day Treasury bill return, obtained from Kenneth French’s website[1], as the risk-free rate for the world index and the interest rate for Chinese 3-month time deposit, which is the closest to the US risk-free rate from Datastream, as the risk-free rate for all the Chinese indices.

Hence, the excess returns of the global index and the Chinese national and portfolio indices are the realised returns minus their respective risk-free rate. All these excess returns are recorded on the excel file, named as data for Chinese CAPM.

[1] http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.