A simple test of the CAPM model under bull and bear market conditions : the case of Thailand

Abstract

The current study is aimed at examining the explanatory power of the CAPM model in Bull and Bear markets for Thailand from 2000 to 2006. Using the varying risk model suggested by Fabozzi and Francis (1977), the study evidences that the systematic risks or betas do not differ between Bull and Bear periods. The substantial forces of Bull and Bear markets have no impact on the CAPM model. The CAPM is still robust. Moreover. the study observes size effect in which small stocks are found to outper- form large stocks, regardless of market conditions. However, the reversal of size effect persists in the Bull periods. The results of this study suggest two important implications for the Thai market. First, investors could employ the traditional CAPM model. Second, it is not necessary to predict future Bull and Bear market conditions when estimating the risk premium.