ISE review

Istanbul Stock Exchange

Volume: 6 No: 23 July/August/September 2002

Subjects

· Multi-Beta Capital Asset Pricing Model and an Application in Turkey

· A New Financial Instrument For the Turkish Capital Markets: Exchange Traded Funds (ETFs)

· Global Capital Markets

· ISE Market Indicators

· Book Reviews

· ISE Publication List

Multi-Beta Capital Asset Pricing Model and an Application in Turkey

Hatice Doğukanlı & Serkan Yılmaz Kandır

Abstract

Capital asset pricing model (CAPM) has been making a significant contribution in solving the decision-making problems of portfolios. Yet, the model has its restrictive assumptions. Multi-beta CAPM was developed in order to solve the problem stemming from the assumption that the market is the sole source of risk and considers more risk sources. In this study, multi-beta CAPM has been developed by using the ISE National-100 Index and the ISE-DIBS (Index of T. Bills and T. Bonds) indices as risk factors. This study examines whether 32 stocks of the financial sector are priced appropriately and which risk factor is more effective in stock pricing. According to the results of the regression analysis estimated among stock returns and the ISE National-100 Index and the ISE-DIBS indices, 8 stocks provide statistically meaningful returns. In other words, 8 stocks obtained returns more than the model forecasts. When the importance of risk sources is examined, it is concluded that, the ISE National-100 Index is an important factor in determining stock prices for all stocks, whereas the ISE-DIBS index is an important factor for 12 stocks in the 95% confidence level.

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A New Financial Instrument For the Turkish Capital Markets: Exchange Traded Funds (ETFs)

Çetin Ali Dönmez

Abstract

In this paper, the Exchange Traded Funds (ETFs) as one of the fastest growing products of the last decade have been covered in detail. This product was introduced to the financial markets in early 1990s and has shown a remarkable success which lead us to believe that the ETFs will make great contribution to the Turkish Capital Markets.

Exchange Traded Funds are mainly passive index tracking funds that are traded just like ordinary common stocks, however a very special feature distinguishes them from the classical mutual funds. The ETF shares can be redeemed which means that the investor can deliver the ETF share and get the actual common stocks in the fund. The reverse of this process is also possible. The investor can deliver the stocks in the ETF portfolio and create the ETF share in return. Due to this special feature, the ETFs provide investors the ability to trade the spot index and the price of ETF cannot move outside the arbitrage band. In this paper, the types of ETFs, historical background and their advantages are explained in detail and numerical examples are provided. Using different methods, different hypothetical fund types are constructed and the sources of divergence of prices of the funds and the Istanbul Stock Exchange index are explored. The mechanics of creation/redemption process and arbitrage are explained in detail by well-designed fictitious examples. Moreover, the special cases of dividend payments, stock splits and rights issues are explained with easy to understand examples. In the last section, the necessary amendments in the Turkish regulations are summarized in order for this product to be launched. It is strongly argued that the ETFs which has shown quite rapid progress in other financial markets will draw quite a lot of investors’ interest and will provide new horizons for the market participants. Therefore, it is suggested that the work should be speeded up to introduce this product to the Turkish capital markets as soon as possible.

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