Application of asset pricing models: evidence from Saudi exchange
-
DOIhttp://dx.doi.org/10.21511/imfi.17(1).2020.29
-
Article InfoVolume 17 2020, Issue #1, pp. 348-368
- Cited by
- 1084 Views
-
146 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
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.
- Keywords
-
JEL Classification (Paper profile tab)G10, G11, G12, B23
-
References63
-
Tables10
-
Figures0
-
- Table A1. Descriptive statistics
- Table B1. Correlations for 2x2 sort
- Table B2. Correlations for 2x2x2x2 sort
- Table B3. Correlations for 2x3 sort
- Table C1. Intercepts: 2x3 factors sort on Size and B/M, Size and OP, Size and Inv
- Table D1. Coefficients: 2x3 factors sort on Size and B/M, Size and OP, Size and Inv
- Table E1. Intercepts: 2x2 factors sort on Size and B/M, Size and OP, Size and Inv
- Table F1. Coefficients: 2x2 factors sort on Size and B/M, Size and OP, Size and Inv
- Table G1. Intercepts: 2x2x2x2 factors sort on Size, B/M, OP, Inv
- Table H1. Coefficients: 2x2x2x2 factors sort on Size, B/M, OP, Inv
-
- Aldaarmi, A., Abbod, M., & Salameh, H. (2015). Implementing Fama and French and Capital Asset Pricing Models in Saudi Arabia Market. Journal of Applied Business Research, 31(3), 953-968.
- Alharoni, G., Grundy, B., & Zeng, Qi (2013). Stock returns and the Miller Modigliani valuation formula: Revisiting the Fama and French analysis. Journal of Financial Economics, 110(2), 347-357.
- Al-Zubi, K., & Salameh, H. (2009). Tests of the Fama and French Three Factor Model in Jordan. Sasin Journal of Management, 15(1), 4-25.
- Amihud, Y. (2002). Illiquidity and stock returns: cross-section and time-series effects. Journal of Financial Markets, 5(1), 31-56.
- Banz, R. (1981). The relationship between return and market value of common stocks. Journal of Financial Economics, 9(1), 13-18.
- Bhatnagar, C. S., & Ramlogan, R. (2012). The capital asset pricing model versus the three factor model: A United Kingdom Perspective. International Journal of Business and Social Research, 2(1), 51-65.
- Bartholdy, J., & Peare, P. (2005). Estimation of Expected Return: CAPM vs. Fama and French, International Review of Financial Analysis, 14(4), 407-427.
- Bianchi, D. (2016). A Dynamic Test of Conditional Asset Pricing Models (Working Paper).
- Brighi, P., et. al. (2013). Too Small or Too Low? New Evidence on the 4-Factor Model, Modern Bank Behaviour, 176-199.
- Blitz, D., Hanauer, M., Vidojevic, M., & Vliet, P. (2016). Five Concerns with the Five-Factor Model (Working paper No. 2668236).
- Bundoo, S. (2008). An Augmented Fama and French Three-Factor Model: New Evidence from an Emerging Stock Market. Applied Economics Letters, 15(15), 1213-18.
- Chen, L., Novy-Marx, R., & Zhang, L. (2011). An Alternative Three-Factor Model (Working Paper).
- Connor, G., & Sehgal, S. (2001). Tests of Fama and French Model in India (Economic & Social Research Council, Discussion Paper No. 379).
- Daniel, K., & Titman, S. (1997). Evidence on the Characteristics of Cross Variation in Stock Returns. Journal of Finance, 52(1), 1-33.
- Daniel, K., Titman, S., & Wei, K. (1999). Explaining the Cross-Section of Stock Returns in Japan: Factors or Characteristics. Journal of Finance, 56(2), 743-766.
- Davis, J., Fama, E., & French, K. (2000). Characteristics, Co-variances and Average Returns: 1929 to 1997. Journal of Finance, 55(1), 389-406.
- Drew, M. E., Naughton, T., & Veeraraghavan, M. (2003). Firm size, book-to-market equity and security returns: evidence from the Shanghai Stock Exchange. Australian Journal of Management, 28(2), 119-139.
- Eraslan, V. (2013). Fama and French Three-Factor Model: Evidence from Istanbul Stock Exchange. Business and Economics Research Journal, 4(2), 11-22.
- Faff, R. (2001). An Examination of the Fama and French Three Factor Model Using Commercially Available Factors. Australian Journal of Management, 26(1), 1-17.
- Fama, E., & MacBeth, J. (1973). Risk, Return and Equilibrium: Empirical Tests. Journal of Political Economy, 81(3), 607-36.
- Fama, E., & French, K. (1992). The Cross- Section of Expected Stock Return. Journal of Finance, 47(2), 427-65.
- Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of financial economics, 33(1), 3-56.
- Fama, E. F., & French, K. R. (1995). Size and Book-to-Market Factors in Earnings and Returns. Journal of Finance, 50(1), 131-56.
- Fama, E. F., & French, K. R. (2003). Creating Fama and French Factors with Style. Financial Review, 38(2), 311-22.
- Fama, E., & French, K. (2003). The Capital Asset Pricing Model: Theory and Evidence, Journal of Economic Perspectives, 18(30), 25-46.
- Fama, E., & French, K. (2007). Disagreement, Tastes, and Asset Prices. Journal of Financial Economics, 83(3), 667-689.
- Fama, E., & French, K. (2017). International Tests of a Five-Factor Asset Pricing Model. Journal of Financial Economics, 123(3), 441-463.
- Fama, E., & French, K. (2012). Size, Value, and Momentum in International Stock Returns. Journal of Financial Economics, 105(3), 457-472.
- Fama, E. F., & French, K. R. (2015). A five-factor asset pricing model. Journal of Financial Economics, 116(1), 1-22.
- Gomes, J., Kogan, L., & Zhang, L. (2003). Equilibrium Cross Section of Returns. Journal of Political Economy, 111(4), 693-732.
- Griffiin, J. (2002). Are the Fama and French Factors Global or Country Specific. Review of Financial Studies, 15(3), 783-803.
- Gregory, A., & Michou, M. (2009). Industry Cost of Equity Capital: UK Evidence. Journal of Business Finance & Accounting, 36(5-6), 679-704.
- Habib, W. (2016). Empirical Asset Pricing – Saudi Stylized Facts and Evidence. Economics World, 4(1), 37-45.
- Haugen, R. (1997. Modern Investment Theory. London: Prentice-Hall.
- Hoang, T., Huy, N., & Phong, N. (2013). Four Factors Model in Asset Pricing: Fama & French Three Factors Model is Combined with Liquidity in the Stock Exchange of Vietnam. In Handbook on the Economic, Finance and Management Outlooks, Conscientia Beam (pp. 1-4).
- Horowitz, J., Loughran, T., & Savin, N. (1996). A Spline Analysis of the Small Firm Effect: Does Size Really Matter (Working Paper 96-09).
- Hühn, H. (2016). Industry Momentum: The Role of Time-Varying Facto Exposures and Market Conditions (Working Paper).
- Hamid, Z., Hanif, A., Malook, S., & Wasimullah, S. (2012). Fama and French three factor model: Empirical evidence from financial market of Pakistan. African Journal of Business Management, 6(8), 2945-2950.
- Homsud, N., Wasunsakul, J., Phuangnark, S., & Joongpong, J. (2009). A study of Fama and French three factors model and capital asset pricing model in the Stock exchange of Thailand. International Research Journal of Finance and Economics, 25, 31-40.
- Jegadeesh, N., & Titman, S. (1993). Returns to Buying Winners and Selling Losers: Implication for Stock Market Efficiency. Journal of Finance, 48, 65-91.
- Jensen, M., Black, F., & Scholes, M. (1972). The Capital Asset Pricing Model: Some Empirical Tests (Working Paper).
- Khalafalla, A. (2014). Portfolio Formation; Empirical Evidence from Khartoum Stock Exchange. International Journal of Social Sciences and Entrepreneurship, 1(9), 1-20.
- Kim, D. (1997). A Reexamination of Firm Size, Book-to-Market, and Earnings Price in the Cross-section of Expected Stock Returns. Journal of Finance, 32(4), 463-89.
- Kim, S., Kim, D., & Shin, H. (2012). Evaluating Asset Pricing Models in the Korean Stock Market, Pacific-Basin Finance Journal, 20(2), 198-227.
- Liu, W. (2006). A Liquidity-Augmented Capital Asset Pricing Mode. Journal of Financial Economics, 82(30), 631-671.
- Markowitz, H. (1952). Portfolio Selection. Journal of Finance, 7, 77-91.
- Naceur, S., & Chaibi, H. (2007). The Best Asset Pricing Model for Estimating Cost of Equity: Evidence from the Stock Exchange of Tunisia (Working Paper).
- Novy-Marx, R. (2013). The other side of value: The gross profitability premium. Journal of Financial Economics, 108(1), 1-28.
- Pham, V. (2007). Constructing Fama-French Factors from Style Indexes: Japanese Evidence. Economics Bulletin, 7(7), 1-10.
- O’Brien, M. (2007). Fama and French Factors in Australia (Working Paper).
- Reinganum, M. (1982). A Direct Test of Roll’s Conjecture on the Firm Size Effect. Journal of Finance, 37(1), 27-35.
- Roll, R. (1981). A Possible Explanation of the Small Firm Effect. Journal of Finance, 36(4), 879-88.
- Saudi Stock Exchange Tadawul.
- Shaker, M., & Elgiziry, K. (2013). Asset Pricing Tests in the Egyptian Stock Market (Working Paper).
- Shaker, M., & Elgiziry, K. (2014). Comparisons of Asset Pricing Models in the Egyptian Stock Market, Accounting and Finance Research, 3(40), 24-30.
- Shaker, M. (2015). Emerging market asset prices: Evidence from Egypt (Working Paper).
- Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, 19(3), 425-442.
- Shams, M., Abshari, L., Kordlouie, H., Naghshineh, N., & Gholipour, M. (2014). Studying the Relationship between Liquidity Risk and Market Risk with Non-Ordinary Return at Fama-French Three Factor Model at Tehran Stock Exchange. International Business Research, 7(2), 53-63.
- Tahaa, R., & Elgiziry, K. (2016). A Five-Factor Asset Pricing Model: Empirical Evidence from Egypt. International Journal of Business, 21(4), 342-372.
- Unlu, U. (2013). Evidence to Support Multifactor Asset Pricing Models: The Case of The Istanbul Stock Exchange. Asian Journal of Finance & Accounting, 5(1), 197-208.
- Wang, Y., & Di, Iorio, A. (2007). The cross section of expected stock returns in the Chinese A-share market. Global Finance Journal, 17(30), 335-349.
- Wahal, S. (2017). The Profitability and Investment Premium: Pre-1963 Evidence. Journal of Financial Economics.
- Saudi Stock Exchange Tadawul (n.d.).