scholarly journals An Empirical Assessment of the Q-Factor Model: Evidence from the Karachi Stock Exchange

2017 ◽  
Vol 22 (2) ◽  
pp. 117-138 ◽  
Author(s):  
Humaira Asad ◽  
Faraz Khalid Cheema
Keyword(s):  
Stock Returns ◽  
Stock Markets ◽  
Small Firms ◽  
Factor Model ◽  
Stock Exchange ◽  
Emerging Market ◽  
Developed Countries ◽  
Q Factor ◽  
Fama And French ◽  
Using Data

This paper tests the validity of the q-factor model on stocks listed on the Karachi Stock Exchange in Pakistan. The q-factor model is an investment-based factor model that explains stock returns based on market, profitability, investment and size factors and it tends to outperform the traditional CAPM, the Fama and French (1993) three-factor model and Carhart (1997) four-factor model, with some exceptions. While the model has been tested using data from stock markets in developed countries, the dynamics of emerging stock markets are significantly different, warranting a reapplication of the model to average stock returns in a developing market. We use data from the Karachi Stock Exchange to test the model in an emerging market context. The results show that, as firms increase their investment, their stock returns decline. Hence, a firm’s investment is conditional on a given level of profitability. The size effect is strongly significant for small firms, but absent for large firms. Finally, the study identifies new factors that give a better understanding of returns in the context of an emerging economy such as Pakistan.

scholarly journals THREE FACTOR MODEL DAN KEPEMILIKAN ASING TERHADAP TINGKAT RETURN

2012 ◽  
Vol 11 (2) ◽  
Author(s):  
Richard Irawan ◽  
Werner R. Murhadi
Keyword(s):  
Stock Markets ◽  
Factor Model ◽  
Developed Countries ◽  
Foreign Ownership ◽  
Market Liberalization ◽  
Panel Data Regression ◽  
Data Regression ◽  
Stock Market Liberalization ◽  
Fama And French ◽  
Positive Effect

Indonesian government issued various regulations and policies of market liberalization and provide the widest opportunities both local and foreign investors to trade. Stock market liberalization should improve market efficiency is similar to the stock markets of developed countries. Intensive research conducted by Fama and French succeeded in explaining the performance of stocks in developed countries with three factors model approach. This study tried to model the stock markets of Indonesia and the added factor of foreign ownership is considered by some to dominate price movements. This study used a sample of 269 firms from 2008 to 2011 period. The study uses panel data regression. The results showed the market factor, size and book-to-market has a positive effect on returns while foreign ownership factors do not affect significantly.

scholarly journals THE FOUR-FACTOR MODEL AND STOCK RETURNS IN BANGLADESH

2021 ◽  
Vol 6 (2) ◽  
pp. 133-149
Author(s):  
Muhammad Saifuddin Khan ◽  
Md. Miad Uddin Fahim
Keyword(s):  
Asset Pricing ◽  
Stock Returns ◽  
Factor Model ◽  
Stock Exchange ◽  
Explanatory Power ◽  
Jel Classification ◽  
Expected Return ◽  
Market Factors ◽  
Fama And French ◽  
Three Factor

For determining the expected return, and asset pricing, CAPM (Capital asset pricing model) is being used dominantly grounded on only the market (systematic) risk-factor though several anomalies have been revealed in this model. Fama and French (1993) have addressed those anomalies and developed the Three-factor model by combining size and value factors besides market factors. Over time, Carhart (1997) has further developed a model addressing momentum factor besides the three factors of Fama and French (1993) which is known as the Carhart four-factor model. Though several kinds of research have been conducted on the CAPM and three-factor model, little works have been accompanied by the Carhart four-factor model in an evolving market like Bangladesh. The goal of this work is to examine the validity of the Carhart four-factor model and examine the loftier explanatory power in Dhaka Stock Exchange (DSE). From the regression analysis of the Carhart model, we have found that market, size, value, and momentum explain the excess stock return. This study indicates that the Carhart model has the lowest GRS F-statistic, highest adjusted R-squared, and lowest Sharpe ratio in contrast to the CAPM and three-factor model which indicates the superior explanatory power and statistical validity of the Carhart model. JEL Classification Codes: G12, G13, G14.

Investigating the Momentum Effect in the Merging Market: Evidence from Pakistan

2021 ◽  
pp. 097215092199150
Author(s):  
Sher Khan ◽  
Fazale Wahid ◽  
Aftab Rahim ◽  
Arshad Ali ◽  
Ahtasham Ahmad
Keyword(s):  
Stock Returns ◽  
Significant Relationship ◽  
Factor Model ◽  
Stock Exchange ◽  
Emerging Market ◽  
Pricing Model ◽  
Momentum Effect ◽  
Momentum Strategies ◽  
Holding Period ◽  
High Return

The momentum effect has been extensively studied in previous studies. However, this topic has received scarce attention in Pakistan’s stock market. We investigate the influence of momentum strategies on the stock returns by utilizing the capital assets pricing model (CAPM), Carhart four-factor model, 25 momentum strategies and by employing 466 firms’ data from Pakistan stock markets over the period from 2009 to 2017. The results suggest the inexistence of momentum effects in the Pakistan Stock Exchange. The CAPM can explain the momentum profit of 6/1 and 9/1 strategies. The results of the Carhart four-factor model reveals a positive and significant relationship between portfolios’ return and market and value premium. Conversely, there is a negative and significant relationship between portfolios’ return and size and momentum factor. For momentum strategies, 3 out of 25 zero-cost portfolios are positive and statistically significant, confirming a momentum effect. However, with 6 and 9 months of formation period and 1 month of the holding period (6/1; 9/1), the portfolios generate a significantly high return. This study contributes new knowledge to the momentum literature, providing new perspectives to understand the momentum effect in an emerging market like Pakistan.

Risk and returns in Shari’ah-compliant cross-section stocks: evidence from an emerging market

2019 ◽  
Vol 10 (5) ◽  
pp. 621-643
Author(s):  
Muhammad Hanif ◽  
Abdullah Iqbal ◽  
Zulfiqar Shah
Keyword(s):  
Risk Factors ◽  
Stock Returns ◽  
Factor Model ◽  
Stock Exchange ◽  
Emerging Market ◽  
Explanatory Power ◽  
Market Returns ◽  
Content Type ◽  
The Impact ◽  
Three Factor

Purpose This study aims to understand and document the impact of market-based – market returns and momentum – as well as firm-specific – size, book-to-market (B/M) ratio, price-to-earnings ratio (PER) and cash flow (CF) – factors on pricing of Shari’ah-compliant securities as explanation of variations in stock returns in an emerging market – Pakistan’s Karachi Stock Exchange. Design/methodology/approach Initially, the authors test Fama and French (FF) three-factor model – market risk premium, size and B/M – followed by modified FF model by including additional risk factors (PER, CF and momentum) over a 10-year period (2001-2010). Findings Our results support superiority of FF three-factor model over single-factor capital asset pricing model. However, addition of further risk factors – including PER, CF and momentum – improves explanatory power of the model, as well as refines the selection of risk factors. In this study, CF, B/M and momentum factors remain insignificant. Traditional B/M factor in FF model is replaced by PER. Practical implications Based on the modified FF model, the authors propose a stock valuation model for Shari’ah-compliant securities consisting of three factors: market returns, size and earnings, which explains 76per cent variations in cross sectional stock returns. Originality/value To the best of the authors’ knowledge, this is the first study (which combines market-based as well as fundamental factors) on pricing of Islamic securities and identification of risk factors in an emerging market – Karachi Stock Exchange.

scholarly journals Application of asset pricing models: evidence from Saudi exchange

2020 ◽  
Vol 17 (1) ◽  
pp. 348-368
Author(s):  
Hussein Mohammad Salameh
Keyword(s):  
Stock Returns ◽  
Factor Model ◽  
Stock Exchange ◽  
Explanatory Power ◽  
Generalized Method Of Moments ◽  
Stock Exchanges ◽  
East Region ◽  
Consistent Model ◽  
Fama And French ◽  
The Impact

The Saudi Arabia Stock Exchange (Tadawul) is one of the biggest emerging Stock Exchanges in the Middle East region. Therefore, this research aims to apply Fama and French (2015) 5-factor model on Tadawul, and compares it with the Fama and French 3-factor model and CAPM to check the applicability of the models in Tadawul and the identity of the factors that can affect stock returns. Furthermore, the Generalized Method of Moments (GMM) regression has been implemented to examine the impact between the variables in the models. Empirically, the results show that Fama and French (2015) 5-factor model is the most consistent model in comparison to the other two models in terms of explaining the cross-section of average stock returns in Tadawul. However, it is not the best according to the intercepts results of all the regressions in 2x3, 2x2, or 2x2x2x2 sorts. Besides, Fama and French (2015) 5-factor model has the highest explanatory power in most of the portfolios based on the adjusted R2 regardless of the sort (2x3, 2x2, or 2x2x2x2). Finally, the results conclude that Fama and French (2015) 5-factor model can be an applicable model in Tadawul but only market and size can affect the stock returns, while the value, profitability, and investment cannot. Accordingly, the author recommends that, as a continuation of this research, further research can be done, which investigates a model with additional factors like momentum and illiquidity.

scholarly journals Size and Value Premium in Karachi Stock Exchange

2008 ◽  
Vol 13 (2) ◽  
pp. 1-26 ◽  
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.

scholarly journals The Effect of Dividend Announcements on Stock Returns for Companies Listed on the Main Board of the Kuala Lumpur Stock Exchange

2020 ◽  
Author(s):  
Nur-Adiana Hiau Abdullah ◽  
Rosemaliza Abdul Rashid ◽  
Yusnidah Ibrahim
Keyword(s):  
Stock Returns ◽  
Stock Exchange ◽  
Emerging Market ◽  
Abnormal Returns ◽  
Developed Countries ◽  
Agency Cost ◽  
Free Cash Flow ◽  
Market Reactions ◽  
Dividend Announcements ◽  
Dividend Increases

Stock market reactions to the announcements of final dividend increases, decreases and no changes are empirically analyzed in an emerging market environment. A standard event study methodology is adopted to examine the price reactions of 120 listed companies surrounding sixty days of the announcement dates. Although prior studies in developed countries postulate that dividend decreases are associated with negative abnormal returns, such a reaction was not found in the Malaysian capital market. The evidence nevertheless shows that dividend increases lead to positive abnormal returns, supporting the Information Content Hypothesis, Jensen :s Free Cash Flow Hypothesis and Agency Cost Theory. As for the no change dividend announcements, no clear pattern of cumulative average abnormal returns could be observed.  

scholarly journals Empirical Test of Fama and French Three-Factor Model in the Egyptian Stock Exchange

2020 ◽  
Vol 11 (2) ◽  
pp. 5-18
Author(s):  
Mustafa Hussein Abd-Alla ◽  
Mahmoud Sobh
Keyword(s):  
Stock Returns ◽  
Factor Model ◽  
Stock Exchange ◽  
Empirical Test ◽  
Expected Return ◽  
Book To Market Ratio ◽  
Excess Stock Returns ◽  
Fama And French ◽  
Egyptian Stock Exchange ◽  
Three Factor

We test the empirical validity of the three-factor model of Fama and French in the Egyptian Stock Exchange (EGX) using monthly excess stock returns of 50 stocks listed on the EGX from January 2014 to December 2018. Our findings do not support Fama and French three-factor model, where the coefficient of the beta was insignificant. The “SBM” coefficient and the “HML” coefficient were equal to zero and insignificant, which confirms the absence of the small firm effect and book-to-market ratio effect in the market. We conclude that there is no relation between expected return and Fama-French risk factors.

scholarly journals A Multifactor Model of Banking Industry Stock Returns: An Emerging Market Perspective

2011 ◽  
Vol 2 (6) ◽  
pp. 267-275
Author(s):  
Saqib Muneer ◽  
Kashif Ur Rehman .
Keyword(s):  
Stock Returns ◽  
Banking Industry ◽  
Factor Model ◽  
Stock Exchange ◽  
Emerging Market ◽  
Explanatory Power ◽  
Data Availability ◽  
Economic Variables ◽  
Firm Level ◽  
Data Set

The purpose of this study is to examine the stock returns variation to specific macroeconomic and industry variables by applying multi-factor model. The firms of banking industry were selected for this study on the basis of data availability, profitability and performance on the Karachi Stock Exchange. The data for the selected firms and economic variables obtained for the period of 10 years. Descriptive statistics performed for the temporal properties and GARCH model was used to analyze the risk and return relationship. The tests were applied on the stock returns of each firm and on the data set of the entire industry to generalize the results. The results reveal that market return is largely accounts variation in stock returns, however the inclusion of other economic variables has added to the explanatory power of the model. It is also found that industry stock returns are more responsive to changes in economic conditions than firm level stock returns.

scholarly journals The Impact of the Financial Sector on Asset Pricing Tests: Evidence from the Colombo Stock Exchange

2016 ◽  
Vol 8 (2) ◽  
pp. 113
Author(s):  
Amal Peter Abeysekera ◽  
Nimal Pulukkuttige Don
Keyword(s):  
Asset Pricing ◽  
Stock Returns ◽  
Factor Model ◽  
Stock Exchange ◽  
Financial Sector ◽  
Size Premium ◽  
Fama And French ◽  
The Impact ◽  
Three Factor ◽  
Better Than

<p>This paper aims to identify how the inclusion of financial sector affects the ability of asset pricing models to explain the average stock returns in the CSE.  Most of the asset pricing researches, the firms in the financial sector are excluded on the basis that their characteristics and the leverage are notably different than firms in other industries. Therefore the objective of this study is to identify the impact of the inclusion of financial sector on the ability of the Carhart four-factor model to explain the average stock returns in the CSE and to compare its performance with the Capital Asset Pricing Model (CAPM) and the Fama and French three-factor model. The study finds that the four-factor model; incorporating the market premium, size premium, value premium and momentum premium provides a satisfactory explanation of the variation in the cross-section of average stock returns in the CSE, even when the financial sector is included. It is found that the Carhart four-factor model performs better than the CAPM in all scenarios; and that it performs notably better than the Fama and French three-factor model.However, there is no notable difference in the findings either the financial sector is included or not. </p>

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