scholarly journals Equity market anomalies in major European economies

2021 ◽  
Vol 18 (2) ◽  
pp. 245-260
Author(s):  
Asheesh Pandey ◽  
Sanjay Sehgal ◽  
Amiya Kumar Mohapatra ◽  
Pradeepta Kumar Samanta
Keyword(s):  
Asset Pricing ◽  
Factor Model ◽  
Five Factor Model ◽  
Equity Market ◽  
Suitable Model ◽  
Investment Strategies ◽  
Economic Uncertainty ◽  
Market Anomalies ◽  
Time Diversification ◽  
Sharpe Ratios

This paper investigates five leading equity market anomalies – size, value, momentum, profitability, and asset growth, for four Western European markets, namely, Germany, France, Italy and Spain, from January 2002 to March 2018. The study tests whether these anomalies reverse under different macro-economic uncertainty conditions, and evaluates if strategies based on time diversification can be formed using these equity market anomalies. Market anomalies were tested using four major asset pricing models – the Capital Asset Pricing Model, the Fama-French three-factor model, the Carhart model, and the Fama-French five-factor model. Macro-economic uncertainty was tested using two proxies, namely VIX and default premiums. Time diversified strategies were examined by estimating Sharpe ratios of combined portfolios formed by combining winner univariate portfolios. Value effect in Germany, Size effect in France and Profitability effect in Italy and Spain provide the highest unadjusted returns on long side strategies. No significant reversal of these anomalies was found under different macroeconomic uncertainties. Asset pricing tests show that CAPM works well for Spain and Italy, while Carhart’s model explains returns in Germany. The Fama-French five factor model does not seem to be a good descriptor of asset pricing for data. No suitable model for explaining asset returns is identified for France. Finally, it is observed that some of the equity market anomalies seem to be countercyclical and therefore provide time diversification opportunities. The study has implications for academicians, investors, and policy makers by providing insights for developing profitable investment strategies and highlighting the efficacy of alternative models as performance benchmarks.

scholarly journals Relevance of Leverage and Profitability in Risk-Return Paradox: A Study from Pakistan Stock Exchange

2020 ◽  
Vol V (II) ◽  
pp. 9-13
Author(s):  
Muhammad Ramzan ◽  
Maria Sultana ◽  
Muhammad Imran
Keyword(s):  
Asset Pricing ◽  
Factor Model ◽  
Stock Exchange ◽  
Five Factor Model ◽  
Equity Market ◽  
Joint Effect ◽  
Significant Evidence ◽  
Risk Return ◽  
Profitability Premium ◽  
Short Basis

The purpose of this investigation has to investigate the degree of relevance of these components in the domain of asset pricing by augmenting the basic FF-5 factor model with leverage and profitability that whether leverage-profitability dumping portfolios capturing the return by this model. We performed the five-factor model of Fama-French to capture the joint effect of variables and augmented it with leverage and profitability for the Pakistani market utilizing current periodic month-to-month data from the year 1998 to the year 2019. Construction of factors (MKT, SMB, HML, HLMLL, and RMW) is done for the PSX market and scrutinize that how much this five-factor augmented model detentions the returns premium in the Pakistani equity market. To analyze the model experimentally that consolidate subgroups of its factors that explain the portfolio's normal returns are outlined to make tremendous spreads in size, B/M, leverage and profitability and to capture the pattern for observing their imperativeness, 2X2X2X2 sorted version is adopted to construct the factors. Investigation documents the significant evidence on the leverage and profitability premium. Taking a glimpse at the variables alone, the recently presented leverage and profitability factors show alluring, measurably critical returns for a long/short basis for the Pakistani equity market.

scholarly journals The Fama-French Five-Factor Model Plus Momentum: Evidence for the German Market

2020 ◽  
Vol 72 (4) ◽  
pp. 661-684 ◽  
Author(s):  
Philipp Dirkx ◽  
Franziska J. Peter
Keyword(s):  
Asset Pricing ◽  
Preliminary Analysis ◽  
Factor Model ◽  
Five Factor Model ◽  
Explanatory Power ◽  
Market Size ◽  
German Market ◽  
Monthly Data ◽  
Factors Associated ◽  
Country Specific

Abstract We implement the Fama-French five-factor model and enhance it with a momentum factor for the German market using recent monthly data from 2002 to 2019. We construct the factors associated with the market, size, value, profitability, investment, and momentum for the CDAX constituents and examine to what extent this six-factor model captures the return premia in the German market. Our preliminary analysis does not document any significant evidence on the profitability or investment premium. The results on the six-factor model compared with the three-factor model reveal that the additional factors do not add significant explanatory power to the analysis. We conclude that the relevance of the profitability and investment factors within the context of international asset pricing studies cannot be transferred to the country- specific case of the German market.

scholarly journals Sustainable Development Goals and Investment Strategies: The Profitability of Using Five-Factor Fama-French Alphas

2020 ◽  
Vol 12 (5) ◽  
pp. 1842 ◽  
Author(s):  
José Luis Miralles-Quirós ◽  
María Mar Miralles-Quirós ◽  
José Manuel Nogueira
Keyword(s):  
Sustainable Development ◽  
Sustainable Development Goals ◽  
Factor Model ◽  
Five Factor Model ◽  
Well Being ◽  
Good Health ◽  
Investment Strategy ◽  
Investment Strategies ◽  
Responsible Investment ◽  
Development Goals

This study focuses on assets related to Sustainable Development Goals (SDGs), which are the most recent aspect of the Socially Responsible Investment framework and have caught the attention of investors due to their investment opportunities as well as the global challenges that can be achieved. The profitability of developing an investment strategy is shown based on the value of the alphas obtained from the estimation of the Fama-French five-factor model when compared to an equally weighted portfolio, even when transaction costs are taken into consideration. In addition, it is proven that investors should focus their investments on two main SDGs: Good health and well-being (Goal 3) and Industry, innovation and infrastructure (Goal 9).

Evaluating alternative performance benchmarks for Indian mutual fund industry

2017 ◽  
Vol 14 (2) ◽  
pp. 222-250 ◽  
Author(s):  
Sanjay Sehgal ◽  
Sonal Babbar
Keyword(s):  
Asset Pricing ◽  
Mutual Fund ◽  
Factor Model ◽  
Five Factor Model ◽  
Content Type ◽  
Asset Pricing Model ◽  
Fund Managers ◽  
Asset Pricing Models ◽  
Performance Benchmarks ◽  
Fama And French

Purpose The purpose of this paper is to perform a relative assessment of performance benchmarks based on alternative asset pricing models to evaluate performance of mutual funds and suggest the best approach in Indian context. Design/methodology/approach Sample of 237 open-ended Indian equity (growth) schemes from April 2003 to March 2013 is used. Both unconditional and conditional versions of eight performance models are employed, namely, Jensen (1968) measure, three-moment asset pricing model, four-moment asset pricing model, Fama and French (1993) three-factor model, Carhart (1997) four-factor model, Elton et al. (1999) five-index model, Fama and French (2015) five-factor model and firm quality five-factor model. Findings Conditional version of Carhart (1997) model is found to be the most appropriate performance benchmark in the Indian context. Success of conditional models over unconditional models highlights that fund managers dynamically manage their portfolios. Practical implications A significant α generated over and above the return estimated using Carhart’s (1997) model reflects true stock-picking skills of fund managers and it is, therefore, worth paying an active management fee. Stock exchanges and credit rating agencies in India should construct indices incorporating size, value and momentum factors to be used for purpose of benchmarking. Originality/value The study adds new evidence as to applicability of established asset pricing models as performance benchmarks in emerging market India. It examines role of higher order moments in explaining mutual fund returns which is an under researched area.

scholarly journals An empirical investigation of the Fama-French five-factor model

2020 ◽  
Vol 17 (1) ◽  
pp. 143-155 ◽  
Author(s):  
Oleksandr Paliienko ◽  
Svitlana Naumenkova ◽  
Svitlana Mishchenko
Keyword(s):  
Asset Pricing ◽  
Empirical Investigation ◽  
Factor Model ◽  
Five Factor Model ◽  
Portfolio Analysis ◽  
Controversial Issues ◽  
Stock Portfolios ◽  
Stratification Method ◽  
Capm Model ◽  
The One

The article deals with evaluating the securities portfolios in the process of transition from the one-factor CAPM model to the Fama-French five-factor model (FF5F). It identifies the advantages of the latter and discusses the controversial issues regarding its use by portfolio investors in different countries, given the anomalies inherent in asset pricing. Besides, the peculiarities of the statistical stratification method used in the FF5F model to group stock portfolios are revealed, and attention is drawn to some of the debating points of the five-factor model. The proposals have been formulated, which offer broader avenues for taking advantage of the FF5F model and increase the validity of the portfolio analysis results. The article also gives recommendations on modifying the approaches to analyzing small-size portfolios versus big-size portfolios based on partial changes in RMW and CMA factors, threshold proportions, and the use of STARR for asymmetric portfolios. The study substantiates the use of these approaches in testing the Fama-French five-factor model with portfolios composed of blue chips.

scholarly journals A Comparative Study between the Fama and French Three-Factor Model and the Fama and French Five-Factor Model: Evidence from the Egyptian Stock Market

2019 ◽  
Vol 12 (1) ◽  
pp. 52 ◽  
Author(s):  
Nada S. Ragab ◽  
Rabab K. Abdou ◽  
Ahmed M. Sakr
Keyword(s):  
Asset Pricing ◽  
Stock Market ◽  
Factor Model ◽  
Five Factor Model ◽  
Pricing Models ◽  
Asset Pricing Models ◽  
Time Period ◽  
Model Evidence ◽  
Fama And French ◽  
Three Factor

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.

Multi-factor asset pricing models in emerging and developed markets

2019 ◽  
Vol 46 (3) ◽  
pp. 360-380
Author(s):  
Vaibhav Lalwani ◽  
Madhumita Chakraborty
Keyword(s):  
Asset Pricing ◽  
Factor Model ◽  
Five Factor Model ◽  
Superior Performance ◽  
International Studies ◽  
Pricing Models ◽  
Content Type ◽  
Developed Markets ◽  
Asset Pricing Models ◽  
Pricing Errors

Purpose The purpose of this paper is to compare the performance of various multifactor asset pricing models across ten emerging and developed markets. Design/methodology/approach The general methodology to test asset pricing models involves regressing test asset returns (left-hand side assets) on pricing factors (right-hand side assets). Then the performance of different models is evaluated based on how well they price multiple test assets together. The parameters used to compare relative performance of different models are their pricing errors (GRS statistic and average absolute intercepts) and explained variation (average adjusted R2). Findings The Fama-French five-factor model improves the pricing performance for stocks in Australia, Canada, China and the USA. The pricing in these countries appears to be more integrated. However, the superior performance in these four countries is not consistent across a variety of test assets and the magnitude of reduction in pricing errors vis-à-vis three- or four-factor models is often economically insignificant. For other markets, the parsimonious three-factor model or its four-factor variants appear to be more suitable. Originality/value Unlike most asset pricing studies that use test assets based on variables that are already used to construct RHS factors, this study uses test assets that are generally different from RHS sorts. This makes the tests more robust and less biased to be in favour of any multifactor model. Also, most international studies of asset pricing tests use data for different markets and combine them into regions. This study provides the evidence from ten countries separately because prior research has shown that locally constructed factors are more suitable to explain asset prices. Further, this study also tests for the usefulness of adding a quality factor in the existing asset pricing models.

scholarly journals Downside Risk-Based Six-Factor Capital Asset Pricing Model (CAPM): A New Paradigm in Asset Pricing

2020 ◽  
Vol 12 (17) ◽  
pp. 6756
Author(s):  
Usman Ayub ◽  
Samaila Kausar ◽  
Umara Noreen ◽  
Muhammad Zakaria ◽  
Imran Abbas Jadoon
Keyword(s):  
Asset Pricing ◽  
Factor Model ◽  
Five Factor Model ◽  
Downside Risk ◽  
Capital Asset Pricing Model ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Capital Asset ◽  
Asset Pricing Model ◽  
Effective Manner

The importance of downside risk cannot be denied. In this study, we have replaced beta in the five-factor model of using downside beta and have added a momentum factor to suggest a new six-factor downside beta capital asset pricing model (CAPM). Two models are tested—a beta- and momentum-based six-factor model and a downside-beta- (proxy of downside risk) and momentum-based six-factor model. Beta and downside beta are highly correlated; therefore, portfolios are double-sorted to disentangle the correlation. Factor loadings, i.e., size, value, momentum, profitability, and investment, are constructed. The standard methodologies are applied. Data for sample stocks from different non-financial sectors listed in the Pakistan Stock Exchange (PSX) are taken from January 2000 to December 2018. The PSX-100 index and three-month T-bills are taken as proxies for market and risk-free returns. The study uses three subsamples for robustness—period of very high volatility, period of stability, and period of stability and growth with volatility. The results show that the value factor is redundant in both models. The momentum factor is rejected in the beta-based six-factor model only. The beta-based six-factor model shows very low R2 in periods of highly volatility. The R2 is high for the other periods. In contrast, the downside beta six-factor model captures the downside trend of the market in an effective manner with a relatively high R2. The risk–return relationship is stronger for the downside beta model. These reasons lead us to believe that, overall, the downside beta six-factor model is a better option for investors as compared to the beta-based six-factor model in the area of asset pricing models.

scholarly journals A TEST OF THE FAMA-FRENCH FIVE FACTOR MODEL IN COMPARISON TO THE CAPITAL ASSET PRICING MODEL AT THE LUSAKA SECURITIES EXCHANGE

2018 ◽  
Vol 3 (1) ◽  
pp. 35
Author(s):  
Nsama Musawa ◽  
Prof. Sumbye Kapena ◽  
Dr . Chanda Shikaputo
Keyword(s):  
Asset Pricing ◽  
Stock Returns ◽  
Factor Model ◽  
Five Factor Model ◽  
Capital Asset Pricing Model ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Capital Asset ◽  
Asset Pricing Model ◽  
Fama And French

Purpose: The capital asset pricing model (CAPM)  is one of  the basic models in the security price analysis.Many asset pricing models have been developed to improve the CAPM.Among such models is the latest  Fama and French five factor model which is being  empirically tested in various stock markets. This study tested the five factor model in comparison to the capital asset pricing model. Testing the Fama and French Five factor model in comparison to the CAPM was important because the CAPM is widely taken to be the basic model in the security price analysis. Methodology: The Fama and French methodology was used to test  the data from an emerging market, the Lusaka Securities Exchange. A deductive, quantitative research design and secondary data from the Lusaka Securities Exchange was used. Data was analyzed using multiple regression. Results: The results indicate that the Five Factor model is better than the CAPM in capturing variation in the stock returns. The Adjusted R-squared for the five factor model from all individual portfolio sorting was 0.9, while that for the CAPM was 0.13 Unique contribution to theory, practice and policy: This study has contributed to theory in that it has added a voice to the ongoing debt on the suitability of  the new Fama and French Five Factor model which is at the cutting hedge in finance theory.Further the study is from developing capital market. Keywords:, CAPM, Stock returns, Fama and French five factor model

scholarly journals Modelos de Precificação de Ativos e o Efeito Liquidez: Evidências Empíricas no Mercado Acionário Brasileiro

2011 ◽  
Vol 9 (3) ◽  
pp. 383 ◽  
Author(s):  
Márcio André Veras Machado ◽  
Otávio Ribeiro de Medeiros
Keyword(s):  
Asset Pricing ◽  
Stock Returns ◽  
Factor Model ◽  
Five Factor Model ◽  
Explanatory Power ◽  
Liquidity Premium ◽  
Pricing Models ◽  
Portfolio Returns ◽  
Asset Pricing Models ◽  
Three Factor

This paper is aims to analyze whether a liquidity premium exists in the Brazilian stock market. As a second goal, we include liquidity as an extra risk factor in asset pricing models and test whether this factor is priced and whether stock returns were explained not only by systematic risk, as proposed by the CAPM, by Fama and French’s (1993) three-factor model, and by Carhart’s (1997) momentum-factor model, but also by liquidity, as suggested by Amihud and Mendelson (1986). To achieve this, we used stock portfolios and five measures of liquidity. Among the asset pricing models tested, the CAPM was the least capable of explaining returns. We found that the inclusion of size and book-to-market factors in the CAPM, a momentum factor in the three-factor model, and a liquidity factor in the four-factor model improve their explanatory power of portfolio returns. In addition, we found that the five-factor model is marginally superior to the other asset pricing models tested.

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