The Fama-French Five-Factor Asset Pricing Model and Emerging Markets Equity Returns

2019 ◽  
Author(s):  
Selebogo Mosoeu ◽  
Odongo Kodongo
Keyword(s):  
Asset Pricing ◽  
Emerging Markets ◽  
Equity Returns ◽  
Pricing Model ◽  
Asset Pricing Model

scholarly journals Impact of Climate Change Hazard: Carbon Risk on Stock Returns and Asset Pricing

2021 ◽  
Author(s):  
Ume Salma Akbar ◽  
Niaz Ahmed Bhutto ◽  
Suresh Kumar Oad Rajput
Keyword(s):  
Carbon Dioxide ◽  
Asset Pricing ◽  
North America ◽  
Risk Premium ◽  
Carbon Dioxide Emissions ◽  
Equity Returns ◽  
Asia Pacific ◽  
Pricing Model ◽  
Asset Pricing Model ◽  
Fama And French

In this study, I extend the Fama and French five-factor asset pricing model with a sixth factor, namely, carbon risk, to investigate its impact on equity returns. To measure carbon risk, a new factor ‘pollutant minus green,’ is developed using the difference between the weighted average returns of pollutant and green firms across 51 developed and emerging countries across four categories—North America, Europe, Emerging Markets, and the Asia Pacific. The results reveal that North America, Europe, and Asia Pacific markets have a carbon risk premium that gets eliminated in small-cap firms. The carbon risk factor is further tested in left-hand side (LHS) test asset portfolios and found to be more pronounced with size-effect anomaly; specifically, small stock firms report greater declining average returns because of more exposure than the mega-cap stocks to carbon dioxide emissions. Furthermore, size-effect anomaly prevails with profitability and investment factors across firms. Therefore, high profitability, as well as high investment small firms, show a greater decline than the big stock firms in average returns when their carbon dioxide emissions increase. The asset pricing model evaluation is carried out through the Gibbons, Ross, and Shanken test. The six-factor model directed at capturing carbon risk patterns in average equity returns performs better than the three-factor and five-factor models of Fama and French (1993 and 2015) in the majority of categories under 3x3 sorting and compete with both Fama and French model under 2x4x4 sorted LHS portfolios. The finding of this study offers various useful applications for investors, policymakers, brokers, corporations, governmental pollution abatement institutions, and other stakeholders who wish to obtain carbon risk premium.

scholarly journals Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True?

2000 ◽  
Vol 90 (4) ◽  
pp. 787-805 ◽  
Author(s):  
Stephen G Cecchetti ◽  
Pok-Sang Lam ◽  
Nelson C Mark
Keyword(s):  
Asset Pricing ◽  
Equity Premium ◽  
Equity Returns ◽  
Relative Risk Aversion ◽  
Pricing Model ◽  
Asset Pricing Model ◽  
Subjective Beliefs ◽  
Second Moments ◽  
Risk Free Rate ◽  
Free Rate

We study a Lucas asset-pricing model that is standard in all respects, except that the representative agent's subjective beliefs about endowment growth are distorted. Using constant relative risk-aversion (CRRA) utility, with a CRRA coefficient below 10; fluctuating beliefs that exhibit, on average, excessive pessimism over expansions; and excessive optimism over contractions (both ending more quickly than the data suggest), our model is able to match the first and second moments of the equity premium and risk-free rate, as well as the persistence and predictability of excess returns found in the data. (JEL E44, G12)

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