Multifactor consumption based asset pricing models using the US stock market as a reference: Evidence from a panel of developed economies

The focus of this paper is to test whether the Fama and French three-factor and five factor models can capture the variations of returns in the Egyptian stock market as one of the growing emerging markets over the time-period July 2005 to June 2016. To achieve this aim, following Fama and French (2015), the authors construct the Fama and French factors and three sets of test portfolios which are: 10 portfolios double-sorted on size and the BE/ME ratio, 10 portfolios double-sorted on size and operating profitability, and 10 portfolios double-sorted on size and investment for the Egyptian stock market. Using time-series regressions and the GRS test, the results show that although both models cannot be rejected as valid asset pricing models when applied to portfolios double-sorted on size and the BE/ME ratio, they still leave substantial variations in returns unexplained given their low adjusted R2 values. Similarly, when the two models are applied to portfolios double-sorted on size and investment, the results of the GRS test show that both models cannot be rejected. However, when the two models are applied to portfolios double-sorted on size and operating profitability, the results of the GRS test show that both models are strongly rejected which imply that both models leave substantial variations in returns related to size and profitability unexplained. Specifically, the biggest challenge to the two models is the big portfolio with weak profitability which generate a significantly negative intercept implying that the models overestimate its return.

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The Determinants of Risk Premia on the Italian Stock Market: Empirical Evidence on Common Factors in Asset Pricing Models

SSRN Electronic Journal ◽

10.2139/ssrn.2183739 ◽

2012 ◽

Author(s):

Paola Brighi ◽

Stefano d'Addona ◽

Antonio Carlo Francesco Della Bina

Keyword(s):

Asset Pricing ◽

Stock Market ◽

Empirical Evidence ◽

Common Factors ◽

Risk Premia ◽

Pricing Models ◽

Asset Pricing Models

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Market anomalies, asset pricing models, and stock returns: evidence from the Indian stock market

Journal of Asia Business Studies ◽

10.1108/jabs-06-2014-0040 ◽

2015 ◽

Vol 9 (3) ◽

pp. 306-328 ◽

Cited By ~ 4

Author(s):

Saumya Ranjan Dash ◽

Jitendra Mahakud

Keyword(s):

Asset Pricing ◽

Stock Market ◽

Pricing Models ◽

Market Anomalies ◽

Content Type ◽

Asset Pricing Models ◽

Asset Pricing Anomalies ◽

Pricing Anomalies ◽

Fama And French ◽

Three Factor

Purpose – This paper aims to investigate whether the use of conditional and unconditional Fama and French (1993) three-factor and Carhart (1997) four-factor asset pricing models (APMs) captures the role of asset pricing anomalies in the context of emerging stock market like India. Design/methodology/approach – The first step time series regression approach has been used to drive the risk-adjusted returns of individual securities. For examining the predictability of firm characteristics or asset pricing anomalies on the risk-adjusted returns of individual securities, the panel data estimation technique has been used. Findings – Fama and French (1993) three-factor and Carhart (1997) four-factor model in their unconditional specifications capture the impact of book-to-market price and liquidity effects completely. When alternative APMs in their conditional specifications are tested, the importance of medium- and long-term momentum effects has been captured to a greater extent. The size, market leverage and short-term momentum effects still persist even in the case of alternative unconditional and conditional APMs. Research limitations/implications – The empirical analysis does not extend for different market scenarios like high and low volatile market or good and bad macroeconomic environment. Because of the constraint of data availability, the authors could not include certain important anomalies like net operating assets, change in gross profit margin, external equity and debt financing and idiosyncratic risk. Practical implications – Although the active investment approach in stock market shares a common ground of semi-strong form of market efficiency hypothesis which also supports the presence of asset pricing anomalies, less empirical evidence has been explored in this regard to support or repute such belief of practitioners. Our empirical findings make an attempt in this regard to suggest certain anomaly-based trading strategy that can be followed for active portfolio management. Originality/value – From an emerging market perspective, this paper provides out-of-sample empirical evidence toward the use of conditional Fama and French three-factor and Carhart four-factor APMs for the complete explanation of market anomalies. This approach retains its importance with respect to the comprehensiveness of analysis considering alternative APMs for capturing unique effects of market anomalies.

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