YOGYAKARTA- Capital Asset Pricing Model (CAPM) theory is a corner stone in investment theory. CAPM theory is the development of Markowitz’ portfolio theory (1952) that is based on trade-off between risk and return that are linear and positive. Test results of CAPM empirically produced conclusions that are not fully consistent with the theory, for instance the flat SML slope, the negative ties between beta (systemic risk) and return, beta is even considered not influential to the return. “So, in this research, I investigated the extension of CAPM theory with some basic assumptions of CAPM theory being loosened up,” Rachmat Sudarsono, S.E., M.Si., said in his open exam of doctoral program in the Auditorium of BRI 3rd floor, M.Si and Doctoral Program, Fakulty of Economics an Business UGM on Monday (6/12).
Rachmat added that the loosening of some assumptions he made was among others, loosening of assumption of investment period that is multi-period (intertemporal), loosening of assumption of risk factor identification other than market risk (extra-market related risks), and loosening of assumption on mean-variance that is "heteroskedastik" and autoregressive.
The main focus for Rachmat is the validity test and robustness of CAPM theory, at least there are two main issues he found. First is the unconditional CAPM, which is validity testing and robustness of CAPM standard model (single beta). Second is conditional CAPM which is validity testing and/or robustness of CAPM model (time-varying beta). “The result of this research is expected to contribute three contributions, namely theoretical and empirical contribution, methodology and practice,” Rachmat added, who is also Chairman I of Academic in D-3 Program, Faculty of Economics, Padjajaran University, Bandung.
To the panel of examiners, Rachmat said that there were at least seven important findings in his research. First, the GARCH effect that produces beta estimation different from beta estimation if conditional "heteroskedatisitas" is ignored. Second, decomposition and/or period interval of observation in beta estimation and/or CAPM testing that is more consistent. Third, the use of time varying beta with single beta is not strong enough in explaining the relationship phenomenon between return and risk.
Fourth, relationship between return and systemic risk in Indonesian stock exchange can have nature in beta and no longer flat but steeper. Fifth, the role of idiosyncratic risk in Indonesian stock exchange is bigger especially in security investment that is not well diversified. Sixth, CAPM can get difference of magnitude slope SML by giving bigger risk premium during down market instead of up market. Seventh, CAPM gives more consistent explanation with feedback volatility hypothesis in describing market risk premium volatility that is not symmetrical.
After the research, Rachmat said that CAPM model is a parsimony model, consistent with the theory, coherent with data, having prediction strength, and relatively can excel other models. “CAPM Model by considering time-varying beta is better than single beta,” the man born in Cimahi on 27 September 1972 said.
Such condition signifies that in CAPM model research method, market condition is necessary while conditional "heteroskedastisitas" is sufficient. The effect of GARCH will produce beta estimation different from beta estimation if conditional "heteroskedastisitas" is ignored. The implication is that beta role tends to be parallel with market volatility level so if market condition is more volatile, the beta extent is more unstable or time-varying.
The examiners were Prof. Dr. Marwan Asri, M.B.A., Prof. Dr. Eduardus Tandelilin, M.B.A., Dr. Suad Husnan, M.B.A., Dr. Erni Ekawati, M.B.A., M.S.A., Prof. Dr. Jogiyanto H.M., M.B.A., Dr. Mamduh M. Hanafi, M.B.A., Dr. Bambang Riyanto L.S., M.B.A., and Dr. Tri Gunarsih. Rachmat Sudarsono passed cum laude. He became the 1309th doctor from Faculty of Economics and Business UGM.