scholarly journals Testing Multi-Factor Models in ADRs: Emerging Market vs. Developed Market

2020 ◽  
Vol 5 (1) ◽  
pp. 12-21
Author(s):  
Tingting Que ◽  
Wai Yin Mok ◽  
Kit Yee Cheung
Keyword(s):  
Risk Factors ◽  
Risk Premium ◽  
Factor Model ◽  
Five Factor Model ◽  
Emerging Market ◽  
Abnormal Returns ◽  
International Market ◽  
Market Risk Premium ◽  
Developed Markets ◽  
Traditional Risk Factors

This paper tests whether the Carhart four-factor model and the Fama-French five-factor model can explain variation in returns of 1,230 ADRs originating from six developed markets and five emerging markets. We aim to compare emerging market ADRs with developed market ADRs in terms of traditional risk factors significance, model fitness and the existence of abnormal returns. Overall, we find that substantial variations exist among ADRs by their origin-of-market. First, both models show that most of the positive abnormal returns we document accrue to emerging market ADRs, mainly Chinese ADRs. Among the risk factors, market risk premium is found to be most prevalent in both emerging and developed markets. Although we find some difference in the presence of particular risk factors employed in the four-factor vs. five-factor model, overall, there are no significant differences in the explanation power between the two models. Lastly, the low R2 values imply that both models do not work very well with the international market ADRs. 

scholarly journals An Analysis and Comparison of Multi-Factor Asset Pricing Model Performance during Pandemic Situations in Developed and Emerging Markets

Mathematics ◽  
2022 ◽  
Vol 10 (1) ◽  
pp. 142
Author(s):  
Konstantin B. Kostin ◽  
Philippe Runge ◽  
Michel Charifzadeh
Keyword(s):  
Emerging Markets ◽  
Factor Model ◽  
Five Factor Model ◽  
Emerging Market ◽  
Model Performance ◽  
Research Area ◽  
Emerging Countries ◽  
Developed Markets ◽  
The Cost ◽  
Three Factor

This study empirically analyzes and compares return data from developed and emerging market data based on the Fama French five-factor model and compares it to previous results from the Fama French three-factor model by Kostin, Runge and Adams (2021). It researches whether the addition of the profitability and investment pattern factors show superior results in the assessment of emerging markets during the COVID-19 pandemic compared to developed markets. We use panel data covering eight indices of developed and emerging countries as well as a selection of eight companies from these markets, covering a period from 2000 to 2020. Our findings suggest that emerging markets do not generally outperform developed markets. The results underscore the need to reconsider the assumption that adding more factors to regression models automatically yields results that are more reliable. Our study contributes to the extant literature by broadening this research area. It is the first study to compare the performance of the Fama French three-factor model and the Fama French five-factor model in the cost of equity calculation for developed and emerging countries during the COVID-19 pandemic and other crisis events of the past two decades.

scholarly journals Examination and Modification of Multi-Factor Model in Explaining Stock Excess Return with Hybrid Approach in Empirical Study of Chinese Stock Market

2019 ◽  
Vol 12 (2) ◽  
pp. 91
Author(s):  
Jian Huang ◽  
Huazhang Liu
Keyword(s):  
Risk Factors ◽  
Stock Market ◽  
Empirical Study ◽  
Risk Premium ◽  
Stock Price ◽  
Factor Model ◽  
Five Factor Model ◽  
Hybrid Approach ◽  
Chinese Stock Market ◽  
Cyclical Pattern

To search significant variables which can illustrate the abnormal return of stock price, this research is generally based on the Fama-French five-factor model to develop a multi-factor model. We evaluated the existing factors in the empirical study of Chinese stock market and examined for new factors to extend the model by OLS and ridge regression model. With data from 2007 to 2018, the regression analysis was conducted on 1097 stocks separately in the market with computer simulation based on Python. Moreover, we conducted research on factor cyclical pattern via chi-square test and developed a corresponding trading strategy with trend analysis. For the results, we found that except market risk premium, each industry corresponds differently to the rest of six risk factors. The factor cyclical pattern can be used to predict the direction of seven risk factors and a simple moving average approach based on the relationships between risk factors and each industry was conducted in back-test which suggested that SMB (size premium), CMA (investment growth premium), CRMHL (momentum premium), and AMLH (asset turnover premium) can gain positive return.

The asymmetric impact of rational and irrational components of fear index on S&P 500 index returns

2017 ◽  
Vol 9 (3) ◽  
pp. 278-291 ◽  
Author(s):  
Gökçe Soydemir ◽  
Rahul Verma ◽  
Andrew Wagner
Keyword(s):  
Risk Factors ◽  
Risk Premium ◽  
Var Model ◽  
Impulse Responses ◽  
Market Returns ◽  
Stock Market Returns ◽  
Content Type ◽  
Market Risk Premium ◽  
Economic Fundamentals ◽  
The Impact

Purpose Investors’ fear can be rational, emanating from the natural dynamics of economic fundamentals, or it can be quasi rational and not attributable to any known risk factors. Using VIX from Chicago Board Options Exchange as a proxy for investors’ fear, the purpose of this paper is to consider the following research questions: to what extent does noise play a role in the formation of investors’ fear? To what extent is the impact of fear on S&P 500 index returns driven by rational reactions to new information vs fear induced by noise in stock market returns? To what extent do S&P 500 index returns display asymmetric behavior in response to investor’s rational and quasi rational fear? Design/methodology/approach In a two-step process, the authors first decompose investors’ fear into its rational and irrational components by generating two additional variables representing fear induced by rational expectations and fear due to noise. The authors then estimate a three-vector autoregression (VAR) model to examine their relative impact on S&P 500 returns. Findings Impulse responses generated from a 13-variable VAR model show that investors’ fear is driven by risk factors to some extent, and this extent is well captured by the Fama and French three-factor and the Carhart four-factor models. Specifically, investors’ fear is negatively related to the market risk premium, negatively related to the premium between value and growth stocks, and positively related to momentum. The magnitude and duration of the impact of the market risk premium is almost twice that of the impact of the premium on value stocks and the momentum of investors’ fear. However, almost 90 percent of the movement in investors’ fear is not attributable to the 12 risk factors chosen in this study and thus may be largely irrational in nature. The impulse responses suggest that both rational and irrational fear have significant negative effects on market returns. Moreover, the effects are asymmetric on S&P 500 index returns wherein irrational upturns in fear have a greater impact than downturns. In addition, the component of investors’ fear driven by irrationality or noise has more than twice the impact on market returns in terms of magnitude and duration than the impact of the rational component of investors’ fear. Originality/value The results are consistent with the view that one of the most important drivers of stock market returns is irrational fear that is not rooted in economic fundamentals.

scholarly journals Enterprise Multiple and Future Returns of the Brazilian Stock Market

2017 ◽  
Vol 10 (3) ◽  
pp. 431
Author(s):  
Rafael Igrejas ◽  
Raphael Braga Da Silva ◽  
Marcelo Cabus Klotzle ◽  
Antonio Carlos Figueiredo Pinto ◽  
Paulo Vitor Jordão da Gama Silva
Keyword(s):  
Risk Factors ◽  
Stock Market ◽  
Cross Section ◽  
Predictive Power ◽  
Abnormal Returns ◽  
Strong Relationship ◽  
Investment Strategy ◽  
Emerging Countries ◽  
Investment Strategies ◽  
Developed Markets

The estimation of cross-section returns for defining investment strategies based on financial multiples has been proven to be relevant following Fama and French’s (1992) research. One of the challenges for such studies is to identify the main variables that are suitable for explaining the returns in a particular context because the variables that are widely used in developed markets behave differently in emerging countries. In this study, we analyze the predictive power of the EV/EBITDA multiple in the context of the Brazilian stock market. The results show that the analyzed multiple has a strong relationship with the future returns of companies listed on the BM&F BOVESPA index between 2005 and 2013. For the period under review, the investment strategy of purchasing stocks when EV/EBITDA was low and selling stocks when EV/EBITDA was high showed abnormal returns of 15.94% per year, even after controlling for risk factors.

scholarly journals Cross-Sector Style Analysis Of Global Equities Based On The Fama And French Three-Factor Model

2012 ◽  
Vol 11 (2) ◽  
pp. 161
Author(s):  
Heng-Hsing Hsieh ◽  
Kathleen Hodnett
Keyword(s):  
Portfolio Management ◽  
Risk Premium ◽  
Factor Model ◽  
Statistical Significance ◽  
Abnormal Returns ◽  
Risk Premiums ◽  
Portfolio Returns ◽  
Fama And French ◽  
Resource Sector ◽  
Sector Returns

Although the ability of the Fama and French (1993) 3-factor model in explaining style-based portfolio returns have been widely tested, no such test has been conducted on sector-based portfolios. The study conducted by Hsieh and Hodnett (2011) indicate that the resource sector yields significant abnormal returns under the capital asset pricing model (CAPM) over the period from 1999 to 2009. In addition, the book value-to-market ratio and market capitalization are found to have pervasive effects on the pricing of sector returns for global equities. Motivated by this insight, we undertake to test the ability of the Fama and French (1993) 3-factor model in explaining the variations in the global sector returns. Our test results indicate that the market risk premium is the most significant factor that drives the returns in all sectors under review. Although the positive abnormal returns of the resource sector dissipates under the 3-factor model, the industrial sector and the information technology (I.T.) sector yield abnormal returns under the 3-factor model. Unlike the empirical findings on the style portfolios, the signs and statistical significance of the exposures to the value and size risk premiums are not consistent across all sectors. This finding suggests that sector exposures are more unique and distinctive compared to the style portfolios. It could be argued that since most of the style portfolios are directly related to the value and size anomalies, any factor model that incorporates risk premiums on these anomalies would significantly explain the style portfolio returns. However, the ability of such factor model in explaining returns on portfolios formed using methodologies other than style anomalies, such as sector portfolio returns, would be questionable. Taking into account the rising global integration, sector allocation might be more effective in terms of global active portfolio management or international diversification than style allocation and country allocation.

scholarly journals ACCOUNTING INFORMATION IN THE FAMA AND FRENCH THREE-FACTORS MODEL

2020 ◽  
Vol 17 (2) ◽  
Author(s):  
Rianty Pondaag ◽  
◽  
Erni Ekawati ◽  
Keyword(s):  
Risk Factors ◽  
Stock Exchange ◽  
Emerging Market ◽  
Accounting Information ◽  
Market Model ◽  
Portfolio Returns ◽  
Developed Markets ◽  
Fama And French ◽  
Stock Portfolio ◽  
Retained Earnings

The purpose of this study is to reexamine the ability of the Fama-French Three Risk Factor Model to explain stock portfolio returns in countries with different economic levels, as well as examine the effect of accounting information derived from book-to-market on stock portfolio returns. The sample used was a manufacturing company on the Indonesia Stock Exchange and the Tokyo Stock Exchange from 2013-2018. The results show that the three risk factors of the Fama-French model apply consistently to explain the variation in stock portfolio returns in developed markets. For the portfolio of shares in the emerging market, model Fama-French does not consistently assess stock portfolio returns. This research also provides empirical evidence that accounting information contained in book-to-market risk factors is only retained earnings, which has a contribution to the valuation of stock portfolio returns. The results of this study indicate that investors in developed markets are more rational and knowledgeable than emerging markets.

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.

Suicide Risk Factors Among Older Adults: Exploring Thwarted Belongingness and Perceived Burdensomeness in Relation to Personality and Self-Esteem

2018 ◽  
Vol 88 (2) ◽  
pp. 150-167 ◽  
Author(s):  
Allison Eades ◽  
Daniel L. Segal ◽  
Frederick L. Coolidge
Keyword(s):  
Risk Factors ◽  
Older Adults ◽  
Factor Model ◽  
Five Factor Model ◽  
Later Life ◽  
Self Esteem ◽  
Community Dwelling ◽  
Multivariate Techniques ◽  
Thwarted Belongingness ◽  
Perceived Burdensomeness

The objective of this study was to explore the role of personality and self-esteem in later life within two established risk factors for suicidal ideation (SI)—Thwarted Belongingness (TB) and Perceived Burdensomeness (PB). The data about personality (i.e., Five Factor Model [FFM] and Diagnostic and Statistical Manual of Mental Disorders, Fifth Edition Personality Disorders [PD]), self-esteem, TB, PB, and SI were collected from 102 community-dwelling older adults and analyzed using bivariate and multivariate techniques. All FFM domains and most PD traits were significantly correlated with SI, TB, and PB. Furthermore, FFM and PD traits explained a significant and meaningful amount of variance of SI, TB, and PB. Self-esteem demonstrated strong negative relationships with SI, TB, and PB. Personality features and self-esteem are important associated features for SI, TB, and PB. Clinicians should consider this information when assessing and evaluating for suicidal risk among older adults. The findings also highlight the need to consider personality traits in developing prevention strategies.

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