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GESTIÓN DE PORTAFOLIOS Y PLANIFICACIÓN DE INVERSIONES FINAL PROJECT: Testing the empirical implications of an

GESTIÓN DE PORTAFOLIOS Y PLANIFICACIÓN DE INVERSIONES

FINAL PROJECT: Testing the empirical implications of an asset pricing model

INTEGRANTES:

Llanos Palomino, Ivo Rivera Montoya, Marcos Sánchez Neyra, Jorge

of an asset pricing model INTEGRANTES: Llanos Palomino, Ivo Rivera Montoya, Marcos Sánchez Neyra, Jorge Abril

Abril 2012

1. Project objective and some highlights This paper analyzes the behavior of the main six

1. Project objective and some highlights

This paper analyzes the behavior of the main six Peruvian stock market index sectors and empirically tries the validity of the CAPM model. It also analyzes the behavior of the various indices of sectors listed on the BVL considering monthly data from 1999M01 to 2011M12.

E-Views regressions are listed below on annexes, showing also monthly statistical significance and standard errors of the estimates.

1.1 Statistical description of the variables

the estimates. 1.1 Statistical description of the variables 1.2 Portfolio value over the time 6,000 5,000
1.2 Portfolio value over the time 6,000 5,000 4,000 3,000 2,000 1,000 0
1.2 Portfolio value over the time
6,000
5,000
4,000
3,000
2,000
1,000
0

IGBVL

Agriculture

Banks_Finance

Diverse

Industrial

Mining

Service

1.3 Monthly variation (as a % growth rate) of sectors, copper and T-bill (1999M01-2011M12) Agriculture

1.3 Monthly variation (as a % growth rate) of sectors, copper and T-bill (1999M01-2011M12)

Agriculture 99 00 01 02 03 04 05 06 07 08 09 10 11
Agriculture
99 00
01
02
03
04
05
06
07
08
09
10
11

100

80

60

40

20

0

-20

-40

-60

40

30

20

10

0

-10

-20

-30

-40

60

40

20

0

-20

-40

-60

Diverse 99 00 01 02 03 04 05 06 07 08 09 10 11
Diverse
99 00
01
02
03
04
05
06
07
08
09
10
11

Minig

99 00 01 02 03 04 05 06 07 08 09 10 11
99 00
01
02
03
04
05
06
07
08
09
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11
Bank_Financial 99 00 01 02 03 04 05 06 07 08 09 10 11
Bank_Financial
99 00
01
02
03
04
05
06
07
08
09
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11

30

20

10

0

-10

-20

-30

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40

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0

-10

-20

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0

-10

-20

-30

IGBVL 99 00 01 02 03 04 05 06 07 08 09 10 11
IGBVL
99 00
01
02
03
04
05
06
07
08
09
10
11
Services 99 00 01 02 03 04 05 06 07 08 09 10 11
Services
99 00
01
02
03
04
05
06
07
08
09
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11

Copper

99 00 01 02 03 04 05 06 07 08 09 10 11
99 00
01
02
03
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05
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11

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0

-10

-20

-30

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0

-10

-20

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-40

.6

.5

.4

.3

.2

.1

.0

Industrial 99 00 01 02 03 04 05 06 07 08 09 10 11
Industrial
99 00
01
02
03
04
05
06
07
08
09
10
11

TBILL

99 00 01 02 03 04 05 06 07 08 09 10 11
99 00
01
02
03
04
05
06
07
08
09
10
11

1.4 Correlation between BVL and Copper index price

Because mining companies represent a significant percentage of the Peruvian stock market capitalization we would be expected that IGBVL performance is strongly correlated with the price of copper. Reviewing the historical correlation we observe that reaches a value of 0.54, although this reflects a positive correlation, surprises their low value, showing that there is a low correlation between the performance of the Lima Stock Exchange and the price of copper. However, one must consider the context of the sample period, as in other periods their values also changes considerably.

50

40

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0

-10

-20

-30

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99 00 01 02 03 04 05 06 07 08 09 10 11 Copper IGBVL
99
00
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11
Copper
IGBVL
1.5 Correlation matrix of the variables 2. Comments about main indicators  Highests betas: sectors

1.5 Correlation matrix of the variables

1.5 Correlation matrix of the variables 2. Comments about main indicators  Highests betas: sectors AGR

2. Comments about main indicators

Highests betas: sectors AGR and MIN with 1.223 and 1.167 respectively. Meanwhile the lowest beta corresponds to SERVICE sector with 0.446

As we can expect, sector INDUSTRIAL exhibits the closest return on market with a 0.874 beta.

When we regress with LME Copper we can observed that R2 and other statistical indicators reduce it significance.

 Once obtained the betas for all sectors we proceed to compare the performance of
 Once obtained the betas for all sectors we proceed to compare the performance of

Once obtained the betas for all sectors we proceed to compare the performance of the CAPM model for the Peruvian market. The CAPM model allows us to predict the performance of an asset using variables such as risk-free rate (Rf), the excess market return (Exc) and the beta of an asset.

With the data of sectorial betas we perform a cross-section regression between the average excess return of the sectors and the estimated betas in order to determine if the value of the regression coefficient is statistically different from the historical average excess market return. Performing a Wald test we found that the coefficient is statistically different from the excess market return average, so we can conclude that CAPM model does not predict correctly (or at least in a relevant way) the behavior of the Peruvian market.

Results below:

 The IGBVL has greater explanatory power than COPPER3M because the copper was not as
 The IGBVL has greater explanatory power than COPPER3M because the copper was not as

The IGBVL has greater explanatory power than COPPER3M because the copper was not as volatile during the period of the financial crisis; due in part to developing countries´ demand for copper that remained strong, which were not directly affected by this crisis. On the other hand, IGBVL does react strongly basically for bad US economic news, so this can be considered as a differentiating factor between the IGBVL and the price of copper.

The hypothesis of the CAPM performance in the Peruvian market cannot be rejected, because the regression coefficient of cross-sectorial betas explaining the sectorial average excess return is not significantly different from 2.02, the average excess return of the market.

Because mining companies represent a significant percentage of the Peruvian stock market capitalization, one would expect IGBVL performance is strongly correlated with the price of copper. Reviewing the historical correlation it reaches a value of 0.54, although this reflects a positive correlation, its low value, gives us a hint that there is a low correlation between the performance of the IGBVL and the price of copper. However, consider the context of the sample period: while IGBVL behavior and copper prices show a similar trend in levels, differences occur when both variables are observed when the trend is extracted, for example by taking the monthly variations.

Figure of point 1.4 shows more volatile IGBVL especially between 2008 and 2009 period when the financial crisis breaks out in the U.S. So in the second half of 2008 the IGBVL registered sharp falls, higher than those registered in the price of copper, for example in July fell 12.7% IGBV while copper did in 5.3%.

By 2009 the market settle down with the various rescue packages globally to prevent the financial crisis to collapse the major world economies, thus the price of copper and therefore the IGBVL be recovered, but once again is the IGBVL which exhibits the greatest volatility, recovering much faster than copper. Thus, for example, in March of that year the General Index registered a jump of 41.9%, while copper rises by 17.7%.

Test de Wald: We also performed Wald test in order to determine if specific risk

Test de Wald:

We also performed Wald test in order to determine if specific risk could affect the cross/section of average sector excess returns. In this case, we will test the null hypothesis of the independent term = 0. The systemic risk is represented by betas and the specific risk by the constant term.

of the independent term = 0. The systemic risk is represented by betas and the specific
ANNEXES: Regression of sectorial variables With IGBVL-TBILL excess return:

ANNEXES: Regression of sectorial variables

With IGBVL-TBILL excess return:

ANNEXES: Regression of sectorial variables With IGBVL-TBILL excess return:
ANNEXES: Regression of sectorial variables With IGBVL-TBILL excess return:
With COPPER3M-TBILL excess return:

With COPPER3M-TBILL excess return:

With COPPER3M-TBILL excess return:
With COPPER3M-TBILL excess return: