DIFFERENTIAL BETA, FIRM OPACITY AND ASSET PRICING IN THE UK STOCK MARKET
Abstract: Intervalling effect (frequency dependence) in beta, a significant empirical challenge for CAPM and the beta, has significant implications for portfolio theory in terms of the measurement of risk and return as well as performance measurement, evaluation and attribution. Firm opacity may explain frequency dependency in betas. Intervalling effect in betas and the role of opacity i.e. delay in adjusting to new information in asset pricing have been investigated to provide empirical evidence from the UK equity market and contribute to the body of knowledge in the area of asset pricing theory. The empirical analyses are based on daily, weekly, monthly and quarterly beta estimates of the UK sample stocks. The findings provide support for the unconditional CAPM i.e. no consistent mispricing in the UK equity market. However, the empirical trend in individual betas from descriptive statistics and the regression betas for the portfolios exhibited significant intervalling effect. The intervalling effect was robust and consistent across both equally and value-weighted portfolios as well as the two sub-sample periods and did not vary for betas measured from Scholes-William, Dimson, and Fama-French-Carhart specifications. The results of the panel regression analysis suggested that both firm opacity and delay in adjustment to news explained the cross-sectional variations in differential beta. The findings were robust to the introduction of different control variables i.e. liquidity, bid-ask spread, volume turnover, size, book-to-and market ratio. The findings from empirical estimation of alternative models suggested that only the augmented CAPM was able to consistently and accurately price both opaque and transparent assets at high (daily) frequency i.e. lower beta for transparent stocks and higher beta for opaque stocks.
Dr. Muhammad Akbar ( Senior Lecturer in Finance, Birmingham City University (United Kingdom) )
Dr. Muhammad Akbar has completed his PhD in Finance (Differential Beta, Firm Opacity and Asset Pricing in U.K.) from Cardiff Metropolitan University. He has published more than 40 research publications in international journals. Currently he is working as a Senior Lecturer in Finance in Birmingham City University (United Kingdom)