scholarly journals Financial Distress premium in Pakistan’s Banking Stocks

2020 ◽  
Vol 13 (4) ◽  
pp. 127-146
Author(s):  
Fahim Ullah Khan ◽  
Ahmad Fraz ◽  
Asif Ali
Keyword(s):  
Stock Returns ◽  
Financial Distress ◽  
Banking Sector ◽  
Factor Model ◽  
Covariance Structure ◽  
Additional Risk Factor ◽  
Cross Sectional ◽  
Portfolio Returns ◽  
Fama And French ◽  
Model Approach

This paper examines the role of financial distress premium in explaining the stock returns of banking sector in Pakistan using the sample of twenty listed banks for the period of 2008 to 2018. The study has used two methodologies. Firstly, multifactor model approach of Fama and French (1992) is used to test the financial distress premium (additional risk factor) where portfolio returns are regressed with factor premiums in time series framework. Fama and French (1993) argue that the relationship between the stock return and the selected characteristics occur for that reason these characteristics are proxies for non-diversifiable factor risk. So, the characteristic based model approach of Huang (2009) is used in cross-sectional regression framework where stock returns are regressed with the characteristics. The results indicate that the proposed four factor model is applicable in the banking sector of Pakistan where financial distress premium is priced by the market. The characteristic based model shows insignificant impact of distress proxy of Altman Z score on the banking returns. It suggests that the cross-sectional returns are explained on the covariance structure of returns not the characteristics in the Pakistani banking stocks. The findings of the study suggests that the financial distress is important and consider while forming their portfolios.

scholarly journals Impact of WACC in Elucidation of Cross Sectional Stock Returns by Stylized Portfolios: Pragmatic Evidence from Pakistan Stock Exchange

2019 ◽  
Vol IV (I) ◽  
pp. 30-38
Author(s):  
Maria Sultana ◽  
Muhammad Imran ◽  
Muhammad Amjad Saleem
Keyword(s):  
Stock Returns ◽  
Risk Premium ◽  
Factor Model ◽  
Stock Exchange ◽  
Present Theory ◽  
Cross Sectional ◽  
Business Valuation ◽  
Portfolio Returns ◽  
Market Premium ◽  
Investment Choices

The fundamental structure of the present theory of asset pricing underscored clarifying the path as to how the systematic risk is estimated and how investors are adapted to behavior for such risk. The mixed expense of debt and equity that an association should procure to raise funds for its assignments impacts its stock returns through investment choices and is an additional significant segment of business valuation work on the grounds that for putting resources into more risky resources, investors request better yields or higher returns, for legitimizing better yields this risk premium emerging from such risks is included in the returns. Hence, in clarifying portfolio returns, the three-factor model is increased with WACC to analyze its logical force that if WACC is estimated by the market or not through multivariate regressions. Two principle results are deduced by the examination; first; the findings attest to the presence of market premium, size impact, value impact, WACC premium in the equity market of Pakistan. Second, however generally exciting with exceptional interest, when contrasted with FF unique 3-factor model, the models which join WACC outperformed, which also affirmed from Adj.R2 results.

scholarly journals DO THE FAMA AND FRENCH FIVE-FACTOR MODEL FORECAST WELL USING ANN?

2019 ◽  
Vol 20 (1) ◽  
pp. 168-191 ◽  
Author(s):  
Muhammad Naveed Jan ◽  
Usman Ayub
Keyword(s):  
Stock Returns ◽  
Goodness Of Fit ◽  
Factor Model ◽  
Five Factor Model ◽  
Ann Model ◽  
Goodness Of Fit Test ◽  
Portfolio Returns ◽  
Nonlinear Features ◽  
Fama And French ◽  
The One

Forecasting the stock returns in the emerging markets is challenging due to their peculiar characteristics. These markets exhibit linear as well as nonlinear features and Conventional forecasting methods partially succeed in dealing with the nonlinear nature of stock returns. Contrarily, Artificial Neural Networks (ANN) is a flexible machine learning tool which caters both the linear and nonlinear markets. This paper investigates the forecasting ability of ANN by using Fama and French five-factor model. We construct ANN’s based on the composite factors of the FF5F model to predict portfolio returns in two stages; in stage one, the study identifies the best-fit combination of training, testing, and validation along with the number of neurons full sample period. In stage two, the study uses this best combination to forecast the model under 48-months rolling window analysis. In-sample and out-sample comparisons, regression, and goodness of fit test and actual and predicted values of the stock returns of our ANN model reveal that the proposed model accurately predicts the one-month ahead returns. Our findings reinforce the investment concept that the markets compensate the high-risk portfolios more than mid and low beta portfolios and the methodology will significantly improve the return on investment of the investors.

Information risk, stock returns, and asset pricing: Evidence from China

2017 ◽  
Vol 30 (4) ◽  
pp. 379-394 ◽  
Author(s):  
Raheel Safdar ◽  
Chen Yan
Keyword(s):  
Stock Returns ◽  
Factor Model ◽  
Empirical Literature ◽  
Firm Level ◽  
Cross Sectional ◽  
Market Pricing ◽  
Content Type ◽  
Information Risk ◽  
Accruals Quality ◽  
Three Factor

Purpose This study aims to investigate information risk in relation to stock returns of a firm and whether information risk is priced in China. Design/methodology/approach The authors used accruals quality (AQ) as their measure of information risk and performed Fama-Macbeth regressions to investigate association of AQ with future realized stock returns. Moreover, two-stage cross-sectional regression analysis was performed, both at firm level and at portfolio level, to test if the AQ factor is priced in China in addition to existing factors in the Fama French three-factor model. Findings The authors found poor AQ being associated with higher future realized stock returns. Moreover, they found evidence of market pricing of AQ in addition to existing factors in the Fama French three-factor model. Further, subsample analysis revealed that investors value AQ more in non-state owned enterprises than in state owned enterprises. Research limitations/implications The study sample comprises A-shares only and the generalization of the findings is limited by the peculiar institutional and economic setup in China. Originality/value This study contributes to market-based accounting literature by providing further insight into how and if investors value information risk, and it seeks to fill gap in empirical literature by providing evidence from the Chinese capital market.

scholarly journals Capturing Profitability in Asset Pricing Models for Japanese Equities 1994-2016

2018 ◽  
Vol 10 (5) ◽  
pp. 254
Author(s):  
Dong Liu ◽  
Hiroshi Yadohisa
Keyword(s):  
Stock Returns ◽  
Factor Model ◽  
Economic Value ◽  
Equity Returns ◽  
Net Income ◽  
Cross Sectional ◽  
Operating Profit ◽  
Asset Pricing Models ◽  
Profitability Premium ◽  
Value Model

We follow Ball et al. (2015) to investigate and compare firms’ gross profit, operating profit, and net income as predictors of returns for a cross-section of traded Japanese equities spanning 1994-2016. We test the predictive power of profit measures on cross-sectional stock returns using portfolio tests and Fama-MacBeth regressions, find that gross-profit-to-book-equity significantly predict returns on sampled stocks. Consistent with Novy-Marx (2013), we also find that sorting portfolios by gross profitability and book-to-market ratios outperform in the Japanese market. Hence, we create a Market-Profitability-Value model that captures value and profitability premium among returns of sampled stocks. Based on Gibbons-Ross-Shanken test and economic value, we demonstrate that our enhanced model outperforms Fama–French multiple-factor model in isolating influences on equity returns.

scholarly journals Nuclear Hazard and Asset Prices: Implications of Nuclear Disasters in the Cross-Sectional Behavior of Stock Returns

2020 ◽  
Vol 12 (22) ◽  
pp. 9721
Author(s):  
Ana Belén Alonso-Conde ◽  
Javier Rojo-Suárez
Keyword(s):  
Stock Returns ◽  
Factor Model ◽  
Large Fraction ◽  
Factor Models ◽  
Cross Sectional ◽  
Risk Premiums ◽  
Conditional Capm ◽  
Equity Risk ◽  
The Cross ◽  
The Cost

Using stock return data for the Japanese equity market, for the period from July 1983 to June 2018, we analyze the effect of major nuclear disasters worldwide on Japanese discount rates. For that purpose, we compare the performance of the capital asset pricing model (CAPM) conditional on the event of nuclear disasters with that of the classic CAPM and the Fama–French three- and five-factor models. In order to control for nuclear disasters, we use an instrument that allows us to parameterize the linear stochastic discount factor of the conditional CAPM and transform the classic CAPM into a three-factor model. In this regard, the use of nuclear disasters as an explanatory variable for the cross-sectional behavior of stock returns is a novel contribution of this research. Our results suggest that nuclear disasters account for a large fraction of the variation of stock returns, allowing the CAPM to perform similarly to the Fama–French three- and five-factor models. Furthermore, our results show that, in general, nuclear disasters are positively related to the expected returns of a large number of assets under study. Our results have important implications for the task of estimating the cost of equity and constitute a step forward in understanding the relationship between equity risk premiums and nuclear disasters.

scholarly journals Interest rate sensitivity of spanish companies. An extension of the Fama-French five-factor model

2018 ◽  
Vol 68 (4) ◽  
pp. 617-638 ◽  
Author(s):  
Francisco Jareño ◽  
María de la O González ◽  
Marta Tolentino ◽  
Sara Rodríguez
Keyword(s):  
Interest Rates ◽  
Stock Returns ◽  
Factor Model ◽  
Five Factor Model ◽  
Explanatory Power ◽  
Rate Sensitivity ◽  
Share Prices ◽  
Explanatory Variables ◽  
Fama And French ◽  
Recent Financial Crisis

This paper studies the sensitivity of share prices of Spanish companies included in the IBEX-35 to changes in different explanatory variables, such as market returns, interest rates and factors proposed by Fama and French (1993, 2015) between 2000 and 2016. In addition, for robustness, this paper analyses whether the sensitivity of stock returns is different between two periods: precrisis and recent financial crisis. The results confirm that, in general, all the considered factors are relevant. Furthermore, “market return” and “size” factors show greater explanatory power, together with the “value” factor in the crisis period. Regarding the analysis at sector level, “Oil and Energy”, “Basic Materials, Industry and Construction” and “Financial and Real Estate Services” sectors appear to be highly sensitive to changes in the risk factors included in the asset pricing factor model.

Overreaction evidence from large-cap stocks

2014 ◽  
Vol 13 (4) ◽  
pp. 310-325 ◽  
Author(s):  
Tibebe Abebe Assefa ◽  
Omar A. Esqueda ◽  
Emilios C. Galariotis
Keyword(s):  
Stock Returns ◽  
Factor Model ◽  
Investment Strategy ◽  
Past Performance ◽  
Content Type ◽  
Multifactor Models ◽  
Contrarian Strategy ◽  
Fama And French ◽  
Investment Portfolios ◽  
Three Factor

Purpose – The purpose of this paper is to assess the performance of a contrarian investment strategy focusing on frequently traded large-cap US stocks. Previous criticisms that losers’ gains are not due to overreaction but due to their tendency to be thinly traded and smaller-sized firms than winners are addressed. Design/methodology/approach – Portfolios based on past performance are constructed and it is examined whether contrarian returns exist. The Capital Asset Pricing Model (CAPM), Fama and French three-factor model and the Carhart’s (1997) momentum portfolio are used to test whether excess returns are feasible in a contrarian strategy. Findings – The results show an asymmetric performance following portfolio formation. Although both, winners and losers portfolios, have gains during holding periods, losers outperform winners at all times, and with a differential of up to 29.2 per cent 36 months after portfolio formation. Furthermore, the loser and the winner portfolios’ alphas are significant, suggesting that the CAPM and the multifactor models are unable to explain return differentials between winners and losers. Our evidence supports two main conclusions. First, stock market overreaction still holds for a sample of large firms. Second, this is robust to the Fama and French’s (1993, 1996) three-factor model and Carhart’s (1997) momentum portfolio. Findings emphasize the relevance of a contrarian strategy when rebalancing investment portfolios. Practical implications – Portfolio managers can improve stock returns by selling past winners and buying previous loser large-cap US stocks. Originality/value – This paper is the first, to the authors’ knowledge, to examine frequently traded large-cap US stocks to avoid infrequent trading and size concerns.

Dynamic Factors and Asset Pricing

2010 ◽  
Vol 45 (3) ◽  
pp. 707-737 ◽  
Author(s):  
Zhongzhi (Lawrence) He ◽  
Sahn-Wook Huh ◽  
Bong-Soo Lee
Keyword(s):  
Asset Pricing ◽  
Factor Model ◽  
Dynamic Factor ◽  
Pricing Model ◽  
Portfolio Returns ◽  
Dynamic Factors ◽  
Ex Ante ◽  
Out Of Sample ◽  
Competing Models ◽  
Fama And French

AbstractThis study develops an econometric model that incorporates features of price dynamics across assets as well as through time. With the dynamic factors extracted via the Kalman filter, we formulate an asset pricing model, termed the dynamic factor pricing model (DFPM). We then conduct asset pricing tests in the in-sample and out-of-sample contexts. Our analyses show that the ex ante factors are a key component in asset pricing and forecasting. By using the ex ante factors, the DFPM improves upon the explanatory and predictive power of other competing models, including unconditional and conditional versions of the Fama and French (1993) 3-factor model. In particular, the DFPM can explain and better forecast the momentum portfolio returns, which are mostly missed by alternative models.

scholarly journals MULTIFACTOR ASSET PRICING ANALYSIS OF THE BALTIC STOCK MARKET

Ekonomika ◽  
2010 ◽  
Vol 89 (4) ◽  
pp. 85-95 ◽  
Author(s):  
Raimonds Lieksnis
Keyword(s):  
Asset Pricing ◽  
Stock Market ◽  
Factor Model ◽  
Stock Market Index ◽  
Cross Sectional ◽  
Economic Significance ◽  
Market Index ◽  
Fama And French ◽  
The Baltic ◽  
Three Factor

This study investigates whether the Fama–French three-factor asset pricing model is applicable for explaining cross-sectional returns of stocks listed in the Baltic stock exchanges. Findings confirm the validity and economic significance of the three-factor model for the Baltic stock market: only investors who chose to invest in value stocks during the reference period achieved positive returns by matching or beating the returns of the stock market index. The monthly returns of 8 Latvian, 13 Estonian and 27 Lithuanian company stocks are analyzed for the time period from June 2002 till February 2010 by the methodology presented in Davis, Fama, and French (2000). Cross-sectional multivariate regression is calculated with stock portfolios representing the book-to-market and capitalization of companies as independent variables along with the stock market index. The study concludes that these three factors in the three-factor model are statistically significant, but, in line with earlier studies, regression intercepts are significantly different from zero and the model is not statistically confirmed.p>

scholarly journals The Impact of Herding on the Risk Pricing in the Egyptian Stock Exchange

2020 ◽  
Vol 11 (2) ◽  
pp. 19-37
Author(s):  
Mustafa Hussein Abd-Alla ◽  
Mahmoud Sobh
Keyword(s):  
Factor Model ◽  
Stock Exchange ◽  
Additional Risk Factor ◽  
Additional Risk ◽  
Behaviour Factor ◽  
Risk Pricing ◽  
Fama And French ◽  
The Impact ◽  
Egyptian Stock Exchange ◽  
Three Factor

We test the impact of herding behaviour on the risk pricing in the Egyptian Stock Exchange (EGX) by adding an additional risk factor reflecting herding behaviour to the Fama and French three-factor model. We construct a portfolio to mimic an additional risk factor related to herding behaviour, in addition to the original risk factors in the Fama and French three-factor model. The three-factor model will be tested in its original form and re-tested after adding the herding behaviour factor. The study is based on Hwang and Salmon methodology, in which the state space approach based on Kaman’s filter was used to measure herding behaviour. We used monthly excess stock returns of 50 stocks listed on the EGX from January 2014 to December 2018. The results do not support Fama and French model before and after adding the herding behaviour factor, therefore, there is no effect of herding behaviour on the risk pricing in the Egyptian Stock Exchange.

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