Progress Report of the Team Project

Team:
Barbuceanu Teodor
Cojocariu Mihai Robert
Gheorghita Andra-Maria
Kedei Alexandru
Potocea Talisa
Seclaman Andra-Stefania
Stefanescu Alexandru
Tudorache Mihaela
Group 961, D series, III-rd year
Project theme: Pricing capital markets financial products\

In week 9, all the students of our group are still working on their reviews
of the scientific papers. As we said last week, we continued to discover several
similarities between our scientific papers and we try to make some connections,
in order to design the main results and conclusions of the project.
One of our colleague, Potocea Talisa, was able to finish her review of her
scientific paper and I would like to present you some main ideas about her paper
called by the name „An empirical comparison of alternative models of capital
asset pricing in Germany”. Firstly, the authors’ Andreas Sauer and Austin
Murphy, aim is to see exactly which model fits very well on the german capital
market. The authors are going to test the two models, CAPM and CCAPM, in
order to see which one is a better explanatory model of risk-return relationship
in Germany’s stock market.Starting from the idea, Germany is one of the largest
stock market in the world, regarding both market value and trading volume, I
consider that Germany is a very good option to make a scientific paper by
analysing these economic issues. What is more, Germany has a lot of
similarities with U.S as far as we talk about financial decision-making and
modelling.
Going further, the hypothesis of the scientific paper is stated from the very
beginning, more exactly the CAPM is a model with a better fit for the German
stock market. The main authors do not hesitate to come up with a lot of reasons
for which CAPM, which stands for Capital Asset Pricing Model, is better than
CCAPM, which stands for Breeden’s Consumption Capital Asset Pricing
Model, from Germany’s capital markets point of view. Even though the
CCAPM is considered superior from the theoretical point of view, the CAPM is
more consistent with the empirical data in the United States capital market. In
the last decade, there were made several comparisons between U.S and
Germany, which offered a lot of positive support for the CAPM in the German
market.
Both CAPM and CCAPM present a world without any taxes or other
transaction costs in capital markets. The main difference is observed through the
fact that a one-period world is assumed in the CAPM, meanwhile a multi-period
world is assumed in the CCAPM. Moreover, in the case of CAPM,the investors
always try to minimize the return’s volatility on their portfolios and also the risk.
In addition, in one-period world investors eliminate return variation that is not
correlated with the return on the assets market portfolio. On the other part, if we
are talking about CCAPM, investors try to maximize a lifetime utility of
consumption function.This function increseas at a decreasing rate with high
levels of real consumption. Also, in this multi-period world, investors try to
minimize the variance in their consumption stream. Both models incorporate the
wealth volatility risk. In addition, the CCAPM model also incorporates the risk
of changes in reinvestment opportunities.
These were the main ideas about the paper „An empirical comparison of
alternative models of capital asset pricing in Germany” and we hope to make a
greater progress by next week and try to finish analyzing every scientific paper.