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.

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 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>

scholarly journals FAMA AND FRENCH THREE FACTOR MODEL APPLICATION IN THE PAKISTAN STOCK EXCHANGE (PSE)

2017 ◽  
Vol 13 (1) ◽  
pp. 1-11
Author(s):  
Athar Iqbal ◽  
Keyword(s):  
Factor Model ◽  
Stock Exchange ◽  
Least Square Method ◽  
Least Square ◽  
Annual Data ◽  
Theoretical Understanding ◽  
Independent Variables ◽  
Multiple Variable ◽  
Fama And French ◽  
Three Factor

Purpose: This research has been carried out to test empirically the application of Fama and French three factor model on Pakistan Stock Exchange covering forty listed companies using annual data from 1984 to 2012. Methodology: Author selected excess return as dependent variable and three independent variables market risk, size of the firm and the book to market value of the firms in the portfolio. To test the hypotheses, author used panel least square method. Findings: Result shows that all independent variables are significant and have sign as predicted by theoretical understanding. From our result we interpret that three factors model explain returns in its simplified form on long term horizon better than single factor model like CAPM. Implication: The findings of the research paper suggest that developing economy like Pakistan investor and portfolio manager can better understand by applying multiple variable models and its modified form rather than only relying on CAMP covariance sensitivity model.

scholarly journals FAMA AND FRENCH THREE FACTOR MODEL APPLICATION IN THE PAKISTAN STOCK EXCHANGE (PSE)

2017 ◽  
Vol 13 (1) ◽  
pp. 1-11
Author(s):  
Athar Iqbal ◽  
Keyword(s):  
Factor Model ◽  
Stock Exchange ◽  
Least Square Method ◽  
Least Square ◽  
Annual Data ◽  
Theoretical Understanding ◽  
Independent Variables ◽  
Multiple Variable ◽  
Fama And French ◽  
Three Factor

Purpose: This research has been carried out to test empirically the application of Fama and French three factor model on Pakistan Stock Exchange covering forty listed companies using annual data from 1984 to 2012. Methodology: Author selected excess return as dependent variable and three independent variables market risk, size of the firm and the book to market value of the firms in the portfolio. To test the hypotheses, author used panel least square method. Findings: Result shows that all independent variables are significant and have sign as predicted by theoretical understanding. From our result we interpret that three factors model explain returns in its simplified form on long term horizon better than single factor model like CAPM. Implication: The findings of the research paper suggest that developing economy like Pakistan investor and portfolio manager can better understand by applying multiple variable models and its modified form rather than only relying on CAMP covariance sensitivity model.

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.

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 A State-Space Version of Fama and French’s Three-Factor Model: Evidence from the Tunisian Stock Exchange

2016 ◽  
Vol 11 (11) ◽  
pp. 214
Author(s):  
Nejla Bergaoui ◽  
Abdelwahed Trabelsi
Keyword(s):  
Business Cycle ◽  
State Space ◽  
Factor Model ◽  
Stock Exchange ◽  
Credit Market ◽  
Market Conditions ◽  
Macroeconomic Factors ◽  
The Business Cycle ◽  
Fama And French ◽  
Three Factor

We develop a state-space version of the three-factor model of Fama and French (1993) for exploring the macroeconomic determinants of risk underlying size (SMB) and value (HML) factors. To the best of our knowledge, this is the first study that examines how loadings on HML and SMB factors are affected by unanticipated changes in macroeconomic factors and whether they exhibit an asymmetric behavior over the business cycle. We test the hypothesis that the betas associated with HML and SMB factors of firms with different size or a different BE/ME ratio react differently to changes in macroeconomic conditions. In addition to the hypothesis that some type of stocks (value and small ones) become more responsive to such a change during period of economic contraction than during an expansion. Our focus is the Tunisian stock Exchange. The evidence we found supports the time variation of portfolios returns’ sensitivities to market, HML and SMB factors with unanticipated changes in monetary and economic conditions. Hence, the assumption of constant coefficients in the traditional three-factor model seems to be unreasonable. Betas associated with HML and SMB factors showed countercyclical behavior through the phases of the business cycle. In a recession, value (small) firm’s risk associated with the HML (SMB) factor is more strongly affected by worsening credit market conditions than during an economic expansion. Further results show that value (small) firm’s risk associated with the HML (SMB) factor is more strongly affected by tighter credit market conditions than growth (large) firm’s risk. Thus, our results most closely support a risk-based explanation for SMB and HML.

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