Financial Economics, The Cross-Section of Stock Returns and the Fama-French Three Factor Model

Purpose This paper aims to study the cross section of expected returns on Shari’ah-compliant stocks in Pakistan by using single- and multi-factor asset pricing models. Design/methodology/approach To estimate cross section of expected returns of Shari’ah-compliant stocks, the study uses capital asset pricing model (CAPM), Fama-French three-factor model and Fama-French five-factor model. Data for the period 2001-2015 on 217 companies are used. For the market portfolio, PSX-100 and Dow Jones Islamic Index for Pakistan are used. Findings The study could not find empirical support for CAPM using Lintner (1965), Black et al. (1972) and Fama and Macbeth (1973) approach. Nonetheless, the relation between beta and returns is positive in up-market and negative in down-market. The results of Fama-French three-factor and five-factor models suggest that size premium is positive and significant for explaining the cross section of stock returns of small size stocks, whereas value premium is positive and significant for explaining the cross section of returns of high value stocks. Practical implications The results suggest that fund managers can use Shari’ah-compliant stocks for portfolio diversification and for offering specialized investments given the positive market excess returns and the existence of size and value premium on Shari’ah-compliant stocks. Originality/value This is the first study on Fama-French (2015) five-factor model for Islamic capital markets in Pakistan.

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Technology prospect and the cross-section of stock returns: evidence from the Australian market

Corporate Ownership and Control ◽

10.22495/cocv11i1c2art7 ◽

2013 ◽

Vol 11 (1) ◽

pp. 295-303

Author(s):

Qi Shi ◽

Ali F. Darrat ◽

Bin Li ◽

Richard Chung

Keyword(s):

Asset Pricing ◽

Stock Returns ◽

Cross Section ◽

Factor Models ◽

Estimation Methods ◽

Pricing Model ◽

Asset Pricing Model ◽

The Cross ◽

Three Factor

We examine the link between technology prospect and stock returns in the Australian market. Our results suggest that the technology-based asset pricing model outperforms the CAPM and Fama-French three-factor models in explaining the cross-section of the Australian Fama-French 25 size/book-to-market portfolios. The results prove robust to using alternative estimation methods and continue to supports the importance of the technology factor for shaping the cross section of the Fama-French portfolios returns.

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Size and Value Premium in Karachi Stock Exchange

THE LAHORE JOURNAL OF ECONOMICS ◽

10.35536/lje.2008.v13.i2.a1 ◽

2008 ◽

Vol 13 (2) ◽

pp. 1-26 ◽

Cited By ~ 3

Author(s):

Nawazish Mirza ◽

Saima Shahid

Keyword(s):

Stock Returns ◽

Cross Section ◽

Factor Model ◽

Stock Exchange ◽

Capital Budgeting ◽

Market Size ◽

Fund Managers ◽

Fama And French ◽

Daily Returns ◽

Three Factor

This study evaluates the ability of the Fama and French Three Factor model to explain a cross section of stock returns in the Karachi Stock Exchange (KSE). Following Fama and French factor approach, we sorted six portfolios by size and book to market. The sorted portfolios were constituted to represent stocks from each and every sector of KSE. Using Daily returns from January 2003 to December 2007, the excess returns for each portfolio were regressed on market, size and value factors. Our findings, in general, supported the notion of the three factor model. The three factor model was able to explain the variations in returns for most of the portfolios and the results remain robust when the sample was reduced to control for the size effect. Our findings are consistent with most of the studies that suggested the validity of the three factor model in emerging markets. These results warrant for the inclusion of size and value factors for valuation, capital budgeting and project appraisals, thus, having substantial implications for fund managers, analysts and investors.

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Comparative analysis of the explanatory power of the CAPM and the Fama-French three-factor model on cross-sectional variation of returns on stocks trading on the Official market of the Macedonian Stock exchange

Economy, Business and Development: An International Journal ◽

10.47063/ebd.00002 ◽

2021 ◽

Vol 2 (1) ◽

pp. 1-11

Author(s):

Fatmir Besimi ◽

◽

Ana Bisheva

Keyword(s):

Stock Returns ◽

Factor Model ◽

Stock Exchange ◽

Explanatory Power ◽

Capital Asset Pricing ◽

Capital Asset ◽

Cross Sectional ◽

Asset Pricing Model ◽

The Cross ◽

Three Factor

The amount of literature on factors that explain the cross-sectional variation in average returns is vast, however, the majority of these papers attempt to explain the variation of returns in developed and emerging markets. In that sense, the literature lacks sufficient evidence regarding the variation of returns of frontier markets. The Republic of North Macedonia is considered to be a frontier market and in this paper we aim to empirically test the ability of the Capital Asset Pricing Model and the Fama-French Three Factor Model in explaining the cross-sectional variations of stock returns of securities trading on the Macedonian Stock Exchange. The empirical study is based on monthly returns from January 2011 to April 2021. Additionally, we use annual data obtained from the financial statements of the analysed companies included in this study. Using OLS time series regression we find that both models have limited explanatory power of the cross-sectional variation in expected returns on the Macedonian Stock Exchange. The study shows that only the size factor exhibits some limited explanatory power regarding stock returns. Based on the comparative analysis the Fama-French Three-Factor Model describes the variation of returns on the MSE much better than the Capital Asset Pricing Model.

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