scholarly journals DEFAULT RISK PREMIUM AND EQUITY RETURN OF NON-FINANCIAL COMPANIES OF PAKISTAN

2017 ◽  
Vol 5 (1) ◽  
pp. 64-76
Author(s):  
Sadaf Adalat
Keyword(s):  
Risk Premium ◽  
Default Risk ◽  
Stock Exchange ◽  
Explanatory Power ◽  
Weighted Average ◽  
Equity Returns ◽  
Investment Strategies ◽  
Size Premium ◽  
Fama And French ◽  
Market Premium

The current study was aimed to examine the relationship between default risk premium and equity return by using sample of hundred companies from period between 2000 and 2015, listed at Karachi Stock Exchange. The firms are chosen on the basis of market capitalization. To examine the role of market premium, size premium, value premium and default premium in estimating the equity returns, the two pass regression was used. It was found that CAPM is valid model as market premium is priced but explanatory power is low. Similarly, the findings suggested that the CAPM model is not better than Fama and French model. Default risk premium is also significantly influencing equity returns. The study findings provided evidence about premium of default risk anomaly in Pakistani markets during the sample period. In default sorted portfolio the low default stocks earn lower than the high default stocks. This study has implications for decision markers in estimating cost of equity as well as weighted average cost of capital as it provides more information in comparison to CAPM. Moreover, information about premium of size, value and default anomaly may facilitate under developing investment strategies.

scholarly journals Cash to Price Ratio & Stock Returns: Evidence from Emerging Markets

2017 ◽  
Vol 9 (11) ◽  
pp. 153
Author(s):  
Nudrat Fatima ◽  
Muhammad Waqas ◽  
Rameez Hassan ◽  
Ahmad Fraz ◽  
Muhammad Arif
Keyword(s):  
Stock Returns ◽  
Stock Return ◽  
Positive Relationship ◽  
Stock Exchange ◽  
Equity Markets ◽  
Value Premium ◽  
Size Premium ◽  
Market Premium ◽  
Relationship Of ◽  
India And China

This study examines the impact of size premium and value premium on average return in emerging economies i.e. Pakistan, India and China equity markets for the period from June 2000 to June 2015 by using three factors model. This study predicts the significance and positive relationship between value premium(C/P Ratio) and stock return for all non-financial companies listed on Karachi stock exchange, Bombay stock exchange and Shanghai stock exchange on the basis of market Capitalization. The regression results of the study illustrate that size premium predict returns more for small firms than big firms while market premium found significantly positive with stock returns in Pakistan, India, and China. Value premium is found positive for all created portfolios. Therefore, it can be concluded that value effect is present in three emerging markets. High C/P ratio outperforms the low C/P ratio stocks. In this study C/P ratio (value premium) integrated with size and market premium to check whether it can predict stock returns of small and large firms for high or low C/P ratio. The finding is similar that the positive relationship of value premium and stock return and the negative relationship of size premium and stock return. The explanatory power of Fama and French three-factor model is greater than CAPM for all three equity markets, so, the asset pricing model can facilitate investors in efficient portfolio diversification for getting enhanced returns.

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 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 Neglected Firm Effect and Stylized Equity Returns: Evidence from Pakistan

2015 ◽  
Vol 50 ◽  
pp. 100-106 ◽  
Author(s):  
Adnan Akhter ◽  
Shahzad Butt ◽  
Shumaila Chaudhary ◽  
Junaid Kiyani
Keyword(s):  
Stock Market ◽  
Factor Model ◽  
Investment Decision ◽  
Explanatory Power ◽  
Equity Returns ◽  
Analyst Coverage ◽  
Efficient Resource ◽  
The Usa ◽  
Fama And French ◽  
Firm Effect

The neglected stock effect is the phenomenon where less researched stock earns more return than that predicted by the traditional CAPM. The aim of this study is to reveal the bonding between neglected stock premium and equity returns in the stock market of Pakistan by using Fama and French (1992 & 1993) methodology. This study is unique with respect to Pakistan that checks the relationship among neglected stock premium and equity returns on a sample of 200 stocks listed the largest stock market of Pakistan KSE. It is corroborated that neglected firm effect is present in market and priced by the market. This manifests that those stocks which are neglected, less researched and got less analyst coverage earn higher return in comparison to popular stocks that got more analyst coverage. The results also revealed that two factor model has greater explanatory power in comparison to Traditional CAPM. The results of this study are in line with the findings of Arbel and Strebel (1980) and Bertin, Michayluk and Prather (2008) for the USA equity market. Lower research analyst coverage increases the uncertainty for investor that how the company will perform in the future, which ultimately increase the risk factor and so the demand of return from the investors. The decision makers must consider this anomaly while making decisions regarding financing, investing etc. This study will facilitate the investors in taking effective investment decision and for efficient resource allocation.

scholarly journals Investor Sentiments and Fama–French Five-Factor Premia

SAGE Open ◽  
2021 ◽  
Vol 11 (2) ◽  
pp. 215824402110278
Author(s):  
Ume Habibah ◽  
Mujeeb-u-Rehman Bhayo ◽  
Muhammad Shahid Iqbal
Keyword(s):  
Risk Premium ◽  
Explanatory Power ◽  
Composite Index ◽  
Value Premium ◽  
Excess Return ◽  
Monthly Data ◽  
Market Risk Premium ◽  
Size Premium ◽  
Investor Sentiments ◽  
Profitability Premium

This study provides new insights to predict the excess return of a security. As if factor premia are getting influenced by the sentiments that means sentiments are ultimately affecting the excess return of a security. To meet the objective, a composite index developed by Baker and Wurgler is used as sentiment proxy. Monthly data are used from July 1965 to September 2015 in U.S. context. Granger casualty, Vector Autoregression (VAR), and Fama–Macbeth regression are applied to get the results. Results show that investor sentiments significantly drive the Fama factors’ premia: size premium and profitability premium. Sentiments also contain some information to explain the investment premia but fail to explain the market risk premium and value premium. Furthermore, results suggest that sentiments increase the explanatory power of model measured by R square. In short, this study suggests that investor sentiments play a role in explaining the Fama–French five-factor premia.

scholarly journals Trading Volume and Fama-French Three Factor Model on Excess Return. Empirical Evidence from Nairobi Security Exchange

2018 ◽  
Vol 14 (22) ◽  
pp. 276
Author(s):  
Opuodho Gordon Ochere ◽  
Nasieku M. Tabitha ◽  
Olweny Tobias O
Keyword(s):  
Trading Volume ◽  
Quantitative Research ◽  
Factor Model ◽  
Explanatory Power ◽  
Unit Root Test ◽  
Secondary Data ◽  
Excess Return ◽  
Size Premium ◽  
Market Premium ◽  
Three Factor

The main objective of this paper is to examine the effect of Trading Volume on excess return using the Fama-French three factor model of listed companies in Kenya. The research study employed a Quantitative research design to analyses the effect of Trading Volume on excess returns in Nairobi Security Exchange (NSE) during the period 2006 to 2015. Secondary data was used for this study. The study utilized descriptive statistics, correlation, unit root test, Heteroscedasticity, and Autocorrelation test as diagnostic tests. The regression results revealed that Market premium and Value premium (HML) and Trading Volume have a high explanatory power while the size premium (SMB) has a low explanatory power.

scholarly journals Factors of Stock Return and Carhart Model: The Case of Dhaka Stock Exchange (DSE) of Bangladesh

2019 ◽  
Vol 11 (6) ◽  
pp. 14
Author(s):  
Mohammad Akter Hossan ◽  
Mohammad Joynal Abedin
Keyword(s):  
Risk Premium ◽  
Stock Return ◽  
Stock Exchange ◽  
Market Value ◽  
Value Premium ◽  
Excess Return ◽  
Momentum Effect ◽  
Market Risk Premium ◽  
Price Momentum ◽  
Size Premium

The objective of this study is to find factors of stock return by testing validity of Carhart model in Dhaka Stock Exchange (DSE) of Bangladesh. For this purpose, this study uses monthly excess return of portfolios, size, book-to-market value, market return, and price momentum data of 109 sample firms to calculate return factors such as market risk premium, size premium (SMB), value premium (HML), and momentum effect (UMD) for the sample period of 2005 to 2014. Then a total of ten portfolios, six based on size and book-to-market value and four based on size and price momentum, are constructed in this study. Excess return of each of these portfolios are calculated and regressed on the above four factors. Results of this study reveal that in DSE, market risk premium is positively and significantly related with the excess return of all portfolios; Size premium is found positively and significantly related with the return of small size portfolios; Value premium is found negatively and significantly related with the returns of all portfolios except one big portfolio (B/H); momentum effect is found positively and significantly related to the excess return of up (U), big (B), and small (S) size portfolios. It is also evident from R2 value, F statistic, and robustness test of this study that four-factor model is valid and it can predict portfolio returns accurately when there is no abnormality such as market crash occurs in DSE.

Does the fundamental indexation portfolio perform better? An Indian investigation

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Santosh Kumar ◽  
Ranjit Tiwari
Keyword(s):  
Capital Market ◽  
Stock Exchange ◽  
Cash Flows ◽  
Cross Sectional ◽  
Content Type ◽  
Operating Cash Flows ◽  
Asset Pricing Models ◽  
Portfolio Managers ◽  
Fama And French ◽  
Market Premium

Purpose This study aims to compare the fundamental indexation (FI) portfolio vis-à-vis the cap-weighted index (CWI). It also explored the return-generating attributes of the FI portfolios. Design/methodology/approach This study extracted relevant data from the Centre for Monitoring Indian Economy’s Prowess database from March 1996 to March 2017 from a sample of National Stock Exchange (NSE) 500 companies. The FI portfolios were constructed with First_50 and Next_50 stocks using the latest and five years of trailing average aggregations. Further, the regression technique was used to identify the return-generating attributes of FI portfolios. Findings It was found that the FI portfolios based on First_50 and Next_50 stocks outperformed the CWI (i.e. NSE_First_50 and NSE_Next_50) in the Indian capital market, and between the two, the FI portfolios based on Next_50 stocks were superior to the FI portfolios based on First_50 stocks. The cross-sectional superiority of FI portfolios is obvious if they are sorted according to four fundamentals, namely, total income, sales, operating cash flows and profit before depreciation interest tax and amortisation. The return-generating process of FI portfolios is well-explained by market premium followed by value premium and investment premium. Practical implications This study may enable portfolio managers and investors to measure FI portfolios’ superiority in the Indian capital market and identify the return-generating attributes of FI portfolios so that the loadings can be switched amongst different priced factors for higher yield. Further, this study extends the FI literature, providing evidence from one of the world’s fastest-growing economies. Originality/value To the best of the knowledge, this is amongst the first few studies to explore the performance of FI portfolios vis-à-vis CWIs in India, and to use Fama and French (2015) asset pricing models to understand the return-generating attributes of FI portfolios. It is also novel in the sense that it considers the FI portfolios for a longer duration, predating 1997 and coinciding with the inception of CWIs, namely, NSE_First_50 (inception: 1995) and NSE_Next_50 (inception: 1996), reducing the apprehensions of data-snooping biases.

scholarly journals KOMPARASI CAPITAL ASSET PRICING MODEL DAN FAMA-FRENCH THREE FACTOR MODEL DALAM MEMPREDIKSI RETURN SAHAM

2018 ◽  
pp. 747
Author(s):  
Ni Putu Desy Ratna Dewi ◽  
I Wayan Suartana
Keyword(s):  
Asset Pricing ◽  
Risk Premium ◽  
Factor Model ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Capital Asset ◽  
Market Risk Premium ◽  
Asset Pricing Model ◽  
Size Premium ◽  
Market Premium

Tujuan dari penelitian ini adalah untuk membandingkan kemampuan CAPM dan FF3FM dalam memprediksi return saham di Bursa Efek Indonesia.  Populasi dalam penelitian ini adalah perusahaan-perusahaan terdaftar di Bursa Efek Indonesia yang termasuk dalam kelompok saham Indeks Kompas 100 pada periode 2012-2016. Hasil penelitian menunjukkan bahwa variabel market risk premium berpengaruh positif terhadap return pada enam portofolio yang dibentuk dalam CAPM dan FF3FM. Variabel size premium berpengaruh positif pada return portofolio S/H, S/M, dan S/L dan berpengaruh negatif pada return portofolio B/H, B/M, dan B/L. Variabel book to market premium berpengaruh positif pada return portofolio B/H, S/H, dan S/M dan berpengaruh negatif pada return portofolio B/L dan S/L. Sedangkan variabel book to market premium tidak berpengaruh pada return portofolio B/M. Nilai adjusted R square CAPM dan FF3FM menunjukkan bahwa kemampuan FF3FM lebih baik dalam menjelaskan return dibandingkan CAPM.

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.

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