Comparative Analysis of the Capital Asset Pricing Model and Arbitrage Pricing Theory in Estimating Expected Stock Returns in the IDX BUMN20 Index

Febrant Alfariz; Evy Sulistianingsih; Neva Satyahadewi

doi:10.37905/euler.v14i1.37760

Comparative Analysis of the Capital Asset Pricing Model and Arbitrage Pricing Theory in Estimating Expected Stock Returns in the IDX BUMN20 Index

Febrant Alfariz, Evy Sulistianingsih, Neva Satyahadewi

Abstract

This study examines the comparative performance of the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) in estimating expected stock returns within the IDX BUMN20 Index. The study is motivated by the ongoing debate regarding the empirical validity of single-factor and multifactor asset pricing models, particularly in emerging markets such as Indonesia. While prior studies provide mixed evidence, limited research has focused specifically on state-owned enterprise indices, which exhibit distinct risk characteristics. Using monthly stock price data, this study estimates expected returns under both models and evaluates their performance using Mean Absolute Deviation (MAD), which measures the average deviation between estimated and realized returns. In the APT framework, factor sensitivities are estimated using a multifactor regression approach, incorporating macroeconomic variables as systematic risk factors. This allows a more detailed assessment of how multiple sources of risk influence return estimation. The results indicate that the CAPM demonstrates relatively better estimation performance, as reflected by lower MAD values compared to the APT. However, the APT provides additional insights into the role of multiple risk factors, suggesting its relevance in capturing more complex market dynamics. These findings highlight that while simpler models may perform more consistently in certain contexts, multifactor approaches remain valuable for understanding broader sources of systematic risk. The study contributes to the asset pricing literature by providing empirical evidence from the IDX BUMN20 Index and offering a more nuanced comparison between single-factor and multifactor models in an emerging market setting.

Keywords

Expected Return Estimation; Mean Absolute Deviation; Asset Pricing; Indonesian Capital Market; IDXBUMN20 Index

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DOI: https://doi.org/10.37905/euler.v14i1.37760