scholarly journals Liquidity risk, transaction costs and financial closedness: lessons from the Iranian and Turkish stock markets

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Sedighe Alizadeh ◽  
Mohammad Nabi Shahiki Tash ◽  
Johannes Kabderian Dreyer
Keyword(s):  
Asset Pricing ◽  
Transaction Costs ◽  
Stock Markets ◽  
Design Methodology ◽  
Liquidity Risk ◽  
Extreme Case ◽  
Pricing Model ◽  
Content Type ◽  
Asset Pricing Model ◽  
The Impact

Purpose This paper aims to study the impact of liquidity risk and transaction costs on stock pricing in Iran, a closed market operating under a financial embargo and compare the results with those of an important neighboring market, namely, Turkey. Design/methodology/approach This study follows Liu et al. (2016) and incorporates liquidity risk and transaction costs into the traditional consumption-based asset-pricing model (CCAPM) from 2009 to 2017. Effective transaction costs are estimated a la Hasbrouck (2009) and liquidity risk according to eight different criteria. Findings According to the results, both liquidity risk and transaction costs are higher in Iran, possibly due to the financial embargo. Thus, relative to Turkey, this paper should expect a higher increase in the CCAPM pricing performance in Iran when accounting for these two variables. The results are in line with this expectation and indicate that adjusting the CCAPM significantly increases its pricing performance in both countries, but relatively more in Iran. Originality/value This study compares liquidity risk and transaction costs in an economy under the extreme case of a financial embargo to an open yet in other important aspects similar economy from the same region.

High-order moments in stock pricing: evidence from the Chinese and US markets

2019 ◽  
Vol 10 (3) ◽  
pp. 323-346
Author(s):  
Yifan Chen ◽  
Zilin Chen ◽  
Huoqing Tang
Keyword(s):  
Asset Pricing ◽  
Stock Markets ◽  
Factor Model ◽  
High Order ◽  
Pricing Model ◽  
Content Type ◽  
Asset Pricing Model ◽  
Joint Distributions ◽  
Portfolio Returns ◽  
Fama French Factors

Purpose The purpose of this paper is to introduce an augmented high-order capital asset pricing model (AH-CAPM) as a new risk-based model to price stocks. Design/methodology/approach The AH-CAPM is defined as a linear model with high-order marginal moments and co-moments from the joint distributions of the sorted stock portfolio returns and the market return. Findings The performance of the AH-CAPM is tested in the Chinese and US stock markets. Empirical results show that the high-order marginal moments and co-moments from the joint distributions in AH-CAPM contain the risk and return information implied by the Fama–French factors, indicating it as a better risk measurement. Moreover, the AH-CAPM performs better than the Fama–French three-factor model and the Carhart four-factor model in both the Chinese and US stock markets. Originality/value Overall, this study introduces a new asset pricing model with better measurements to incorporate risk information in the stock market.

Revisiting Fama–French’s asset pricing model with an MCB volatility risk factor

2020 ◽  
Vol 21 (3) ◽  
pp. 233-251
Author(s):  
Xiaoying Chen ◽  
Nicholas Ray-Wang Gao
Keyword(s):  
Risk Factor ◽  
Asset Pricing ◽  
Explanatory Power ◽  
Investor Sentiment ◽  
Size Factor ◽  
Pricing Model ◽  
Volatility Risk ◽  
Content Type ◽  
Asset Pricing Model ◽  
Market Factor

Purpose Since the introduction of VIX to measure the spot volatility in the stock market, VIX and its futures have been widely considered to be the standard of underlying investor sentiment. This study aims to examine how the magnitude of contango or backwardation (MCB volatility risk factor) derived from VIX and VIX3M may affect the pricing of assets. Design/methodology/approach This paper focuses on the statistical inference of three defined MCB risk factors when cross-examined with Fama–French’s five factors: the market factor Rm–Rf, the size factor SMB (small minus big), the value factor HML (high minus low B/M), the profitability factor RMW (robust minus weak) and the investing factor CMA (conservative minus aggressive). Robustness checks are performed with the revised HML-Dev factor, as well as with daily data sets. Findings The inclusions of the MCB volatility risk factor, either defined as a spread of monthly VIX3M/VIX and its monthly MA(20), or as a monthly net return of VIX3M/VIX, generally enhance the explanatory power of all factors in the Fama and French’s model, in particular the market factor Rm–Rf and the value factor HML, and the investing factor CMA also displays a significant and positive correlation with the MCB risk factor. When the more in-time adjusted HML-Dev factor, suggested by Asness (2014), replaces the original HML factor, results are generally better and more intuitive, with a higher R2 for the market factor and more explanatory power with HML-Dev. Originality/value This paper introduces the term structure of VIX to Fama–French’s asset pricing model. The MCB risk factor identifies underlying configurations of investor sentiment. The sensitivities to this timing indicator will significantly relate to returns across individual stocks or portfolios.

Introducing the marketplace or not? Risk analysis of channel strategy for online retailers

2019 ◽  
Vol 120 (2) ◽  
pp. 366-387
Author(s):  
Yuan Shi ◽  
Luying Zhou ◽  
Ting Qu ◽  
Qian Qi
Keyword(s):  
Risk Analysis ◽  
Design Methodology ◽  
Operating Costs ◽  
Social Implications ◽  
Pricing Model ◽  
Content Type ◽  
Channel Strategy ◽  
Online Retailers ◽  
The Impact ◽  
Practical Implications

Purpose The purpose of this paper is to help online retailers who have an existing reselling channel to figure out the risk of introducing an additional marketplace channel and identify the introduction threshold with an overall consideration to the fulfilment cost and services. Design/methodology/approach In order to evaluate the risk of the marketplace channel strategy, this paper develops a Retailer–Stackelberg pricing model. Products are divided into two categories according to different fulfilment cost–value ratio to get a more targeted strategy. Findings The results show that the strategy of introducing the marketplace is not always satisfying. Retailers prefer this strategy when they are the prevailing parties in service output. The overall trend is that retailers have to encourage their marketplace partners to improve services for the product with a big fulfilment cost–value ratio. Otherwise, retailers should block the marketplace from entering. Research limitations/implications For an intuitive conclusion, this paper assumes that the operating costs (except fulfilment cost) are equal in two channels. This suggests a need to further investigate the impact of other costs. Meanwhile, it would be interesting to examine the competition among suppliers and retailers. Practical implications This research provides the suggestions for online retailers who want to introduce and well manage the marketplace channel. Social implications This research also helps both academia and industry become more intelligent about the significant influences of category management on channel strategy. Originality/value Most prior research is unaware of the risk of introducing a new channel, which also rarely considers how to manage it. This research points out that the effectiveness of this channel strategy differs in different categories. Moreover, retailers can benefit from managing the marketplace’s service output.

scholarly journals Size premium, value premium and market timing: evidence from an emerging economy

2018 ◽  
Vol 23 (46) ◽  
pp. 266-288
Author(s):  
Syed Haroon Rashid ◽  
Mohsin Sadaqat ◽  
Khalil Jebran ◽  
Zulfiqar Ali Memon
Keyword(s):  
Asset Pricing ◽  
Market Timing ◽  
Capital Asset Pricing Model ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Capital Asset ◽  
Content Type ◽  
Asset Pricing Model ◽  
Size Premium ◽  
Fama And French

Purpose This study aims to investigate the market timing strategy in different market conditions (i.e. up, down, normal and in-financial-crisis situation) in the emerging market of Pakistan over the period 1995 to 2015. Furthermore, this study tests the validity of the capital asset pricing model (CAPM) and Fama and French model. Design/methodology/approach This study considers monthly stock returns of 167 firms and constructs six different portfolios on the basis of different size and book to market ratio. The Treynor and Mazuy model is used to capture the market timing strategy. Findings The results indicate evidence of the market timing in normal market conditions. However, there is less supportive evidence of market timing in up-market, down-market and in-financial-crisis situations. This study also confirms the validity of the capital asset pricing model and Fama and French three-factor model with strong support of value premium and size premium in the stock market. Practical implications The findings of this study are helpful to companies in estimating the cost of issuing equity more accurately. The investors can use market timing to make their investment in a more better and profitable manner. Originality/value Unlike other previous studies, this study considers an extended period to test the validity of the capital asset pricing model and Fama and French model. In addition, this study is novel in testing the marketing timing of the firms in the context of emerging economy of Pakistan.

The relationship between covariance risk and size effects in emerging equity markets

2016 ◽  
Vol 42 (3) ◽  
pp. 174-190 ◽  
Author(s):  
Ming-Chieh Wang ◽  
Jin-Kui Ye
Keyword(s):  
Risk Factors ◽  
Asset Pricing ◽  
Financial Integration ◽  
Equity Markets ◽  
Pricing Model ◽  
Content Type ◽  
Asset Pricing Model ◽  
Portfolio Returns ◽  
Pricing Errors ◽  
The World

Purpose – The purpose of this paper is to examine whether the conditionally expected return on size-based portfolios in an emerging market (EM) is determined by the country’s world risk exposure. The authors analyze the degree of financial integration of 23 emerging equity markets grouped into five size portfolios using the conditional international asset pricing model with both world and domestic market risks. The authors also compare the model’s fitness on the predictability of portfolio returns by using world and EM indices. Design/methodology/approach – This study investigates whether large-cap stocks are priced globally and whether mid- and small-cap stocks are strongly influenced by domestic risk factors. The authors first examine the predictability of large-, mid-, and small-cap stock portfolio returns by using global and local variables, and next compare the model fitness by using world and EM indices on the prediction of size-based stock returns. Finally, the authors test whether the world price of covariance risk is the same for different portfolios. Findings – The authors find that the conditional expected returns of large-cap stocks should be priced by global variables. Mid- and small-cap stocks are influenced by domestic variables rather than global variables, and their returns are priced by local residual risks. The test of the conditional asset pricing model shows that the largest stocks have the smallest mean absolute pricing errors (MAE), and their pricing errors are lower in large markets than in small markets. Third, the EM index offers more predictability for the excess returns of mid- and small-cap stocks than the world market index, but the explanatory power of this index does not increase for large-cap stocks. Originality/value – EMs in the past were known as segment markets, with local risk factors more important than global risk factors, suggesting significant benefits from adding EMs to global portfolios. It would be interesting to examine whether financial integration differs for various firm sizes in the markets.

Mathematical modelling of a shariah-compliant capital asset pricing model

2020 ◽  
Vol 11 (1) ◽  
pp. 90-109 ◽  
Author(s):  
Mohamad Hafiz Hazny ◽  
Haslifah Mohamad Hasim ◽  
Aida Yuzy Yusof
Keyword(s):  
Asset Pricing ◽  
Variance Analysis ◽  
Islamic Finance ◽  
Capital Asset Pricing ◽  
Financial Assets ◽  
Pricing Model ◽  
Capital Asset ◽  
Content Type ◽  
Asset Pricing Model ◽  
Mean Variance

Purpose The capital asset pricing model (CAPM) is the most widely used asset pricing model that measures risk–return relationship. The CAPM is based on Markowitz’s mean variance analysis. The advancement of Islamic finance leads to the question whether or not the practice of modern investment theories and analyses such as the Markowitz’s mean variance analysis and CAPM are in accordance to shariah and could be used in pricing Islamic financial assets. Therefore, this paper aims to present a review of the CAPM and to discourse the set of assumptions underlying the model in terms of shariah compliance. Design/methodology/approach Although most of the assumptions are not contradictory to shariah principles, there are Islamic variables such as prohibition of short selling, purification and zakat that should be taken into consideration when pricing Islamic financial assets. We then develop a mathematical model which is a modification of the traditional CAPM that incorporates principles of Islamic finance and integrating zakat, purification of return and exclusion of short sales. Findings As a proof-of-concept, this paper presents the results of an empirical study on the proposed shariah-compliant CAPM in comparison to the traditional CAPM. The results show that the proposed Islamic CAPM is appropriate and applicable in examining the relationship between risk and return in the Islamic stock market. Originality/value This study contributes to existing body of knowledge by presenting an algorithm and mathematical derivation of the shariah-compliant CAPM which has been lacking in the literature of Islamic finance. The paper offers a novel approach in pricing Islamic financial assets in accordance to shariah, advocated by modern investment theories of Markowitz’s mean variance analysis and CAPM.

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