The Asset Pricing and Bid-Ask Spread: An Empirical Evidence Based on the KLSE Market
Asset pricing theories, particularly the Capital Asset Pricing Model (CAPM) asserts that the expected returns on any particular capital asset consists of only two components, namely the returns on a risk-free security and a premium for the risk. This study reexamines the CAPM by incorporating two...
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| 格式: | Thesis |
| 語言: | English English |
| 出版: |
1998
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| 主題: | |
| 在線閱讀: | http://psasir.upm.edu.my/id/eprint/8064/1/FEP_1998_8_A.pdf |
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| 總結: | Asset pricing theories, particularly the Capital Asset Pricing Model (CAPM) asserts that the expected returns on any particular capital asset consists
of only two components, namely the returns on a risk-free security and a
premium for the risk. This study reexamines the CAPM by incorporating two
important variables, namely the bid-ask spread as a measure of the transaction
costs and firm size to test on the validity of both variables in the equilibrium
asset returns model. Using the Generalized Linear Regression method as
described in Kmenta (1986), this study finds a positive significant relationship between the stock returns and bid-ask spreads as a measure of the transaction
costs for all the three regression models, namely all-companies, average-size
companies and ten size-sorted portfolios models. The findings confirm the
theoretical conjecture that bid-ask spreads are priced in the asset returns, and
stocks with higher bid-ask spreads carry a liquidity premium in their prices. The
results suggest that by decreasing the transaction costs will generate a greater
order flow, which in turn increase the frequency of the market. Nevertheless, the
negative relation between the firm size and stock returns can only be found in
two out of the three regression models, that is, the all-companies and average size
companies models. The results corroborate previous studies where small
firm anomaly exist in the asset pricing model in the KLSE market. However, the
size effect is found to be insignificant in explaining the portfolios returns in the
ten size-sorted portfolios model. Thus, this study evidenced the ability of the
spread variable in explaining the variation in the stock returns as compare to the
firm size variable in the KLSE market. |
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