Drivers of expected returns in Istanbul stock exchange: Fama–French factors and coskewness

We investigate the impact of coskewness on the variation of portfolio excess returns in Istanbul Stock Exchange (ISE) over the period July 1999 to December 2005. We form portfolios according to size, industry, size and book-to-market ratio, momentum and coskewness and compare alternative asset pricing models. The traditional capital asset pricing model (CAPM) and the three-factor model of Fama and French are tested in the multivariate testing procedure of Gibbons–Ross–Shanken (1989). Coskewness is introduced as a fourth factor and its incremental effect over CAPM and Fama–French factors is examined both in multivariate tests and in cross-sectional regressions. The findings reveal that coskewness is able to explain the size premium in ISE. Hence, the basic two-moment CAPM without the coskewness factor would underestimate the expected return of size portfolios. Multivariate test results indicate that coskewness reduces the pricing bias, albeit insignificantly. Cross-sectional analysis uncovers that coskewness has a significant additional explanatory power over CAPM, especially for size and industry portfolios. However, coskewness does not have a significant incremental explanatory power over Fama–French factors in ISE.     

A characterization of the coskewness–cokurtosis pricing model

The coskewness–cokurtosis pricing model is equivalent to absence of any positive-alpha return for which the residual risk has positive coskewness and negative cokurtosis with the market. This parallels the CAPM and also the fundamental theorem of asset pricing.     

Liquidity-adjusted conditional capital asset pricing model

This paper derives a liquidity-adjusted conditional two-moment capital asset pricing model (CAPM) and a liquidity-adjusted conditional three-moment CAPM respectively based on theory of stochastic discount factor. The liquidity-adjusted conditional two-moment CAPM shows that a security's conditional expected excess return consists of three parts: its conditional expected liquidity cost, the systemic risk premium and the liquidity risk premium. The liquidity-adjusted conditional three-moment CAPM shows that a security's conditional expected excess return depends on its conditional expected liquidity cost, the conditional covariance between its return and the market return, the conditional covariance between its liquidity cost and the market liquidity cost, and the conditional coskewness of its return and the market return.     

Performance of value- and size-based strategies in the Italian stock market

This paper investigates the performance of size- and value-based strategies in the Italian stock market in the period 2000–2018. Previous research argued the impossibility to define properly value-sorted portfolios due to the inaccuracy of book-to-market ratios available for Italian listed stocks. Using more accurate data, we implement portfolios sorting based on value and growth stocks, to assess the relevance of the value factor in the Italian stock market. We find that the capital asset pricing model fails to explain the cross-section of returns on the different strategies while the Fama and French three-factor model provides a better fit. The results show that all three factors are significant in explaining Italian stock returns during the sample period. Unlike previous studies, which either found no value effect at all or no clear-cut results when testing the book-to-market variable, we find that the value factor is statistically significant and the associated risk premium is of a considerable size.     

Panel data analysis of multi-factor capital asset pricing models

In this article, we propose MFCAPM panel models with fixed effects and test theories associated with risk exposures and anomalies postulated by Fama and French, and we assess their out-of-sample predictive performances. Based on the portfolios formed by French, we construct 10 panel models, each consisting of 10 portfolios grouped by size deciles, and another 10 panels by value deciles. In the presence of cross-section dependence, the MFCAPM panel model is estimated by the feasible generalized least squares (FGLS) method for the sample period 1963(1)-2018(9). The results show that the market, firm-size and value risk exposures are significant and robust across three-, five- and six-factor panel models. Significant time-fixed effects indicate that there are several portfolios resilient to dot.com bubble peak in 2000, while some others resilient to GFC in 2007. We estimate the models for the in-sample period 1963(1)–1999(12) and generate the out-of-sample portfolio returns for the period 2000(1)–2018(9). We find that portfolio returns forecasts generated by the six-factor panel model are superior to other MFCAPM panel models, mostly due to the momentum factor (investor behaviour) explaining large return variations and volatility exposures. The findings have implications for investors, security traders and portfolio risk managers.     

The possibility of informationally efficient markets

A rational expectations equilibrium with positive demand for financial information does exist under fully revealing asset price—contrary to a wide-held conjecture. Whereas a continuum of investors is inconsistent with fully revealing equilibrium, finitely many investors with average portfolios demand information in equilibrium if they can adjust portfolio size in an additive signal-return model. More information diminishes the expected excess return of a risky asset so that investors who only have a choice of portfolio composition or whose asset endowments strongly differ from the average portfolio are worse off. Under fully revealing price, information market equilibria both with and without information acquisition are Pareto efficient.     

Interest rate,size and book-to-market effects in Australian financial firms

The Fama–French three-factor model (1993) has been extensively used to study the pricing of nonfinancial stocks. This study provides the first examination of the pricing of Australian financial stocks using the Fama–French framework. The four-factor model (market, size, book-to-market and momentum) augmented with the level, slope and curvature of the interest rate term structure is used to examine the pricing of Australian financial stocks. The interest rate factors have not been previously considered for pricing Australian stocks within the Fama–French framework. Consistent with US evidence, we use a system-based estimation to show that the size and book-to-market factors are not priced in the cross section of the equity returns of Australian financial stocks. Momentum and term spread are priced in the equity returns of both financial and nonfinancial stocks. These findings are robust to the inclusion of control variables such as default spread, the inflation rate and a dummy variable for the global financial crisis.     

Global idiosyncratic risk moments

We investigate a global cross-sectional relation between idiosyncratic risk moments and expected stock returns by suggesting three global idiosyncratic volatility, skewness, and kurtosis risk factors. We also suggest two global small minus big and high minus low risk proxies for estimating return residuals of the test assets from a global asset pricing model. To perform robustness checks, we suggest other four global risk factors of momentum, leverage, bid-ask spread, and liquidity. We find a significant negative relation between stock portfolio returns and the global moments, and the cross section of stock returns reflects a significant negative price of risk for global idiosyncratic skewness (?0.13%) and idiosyncratic volatility (?1.85%) and a positive and significant price of risk for global idiosyncratic kurtosis. We find that our suggested risk factors are key drivers of risk premia in stock market and are robust to various checks. These factors also can forecast the gross domestic product growth over the sample period.     

The capital asset pricing model in economic perspective

The capital asset pricing model (CAPM) is theoretically incomplete in its demand-side focus, risk-averse investors and internally inconsistent homogeneous beliefs; is not conclusively supported empirically; and yet it legitimizes a notion that investors can earn higher returns by bearing undiversifiable risk. Our article does not merely extend the CAPM with more realistic assumptions, it completes its original framework by including (1) risk-taking investors in the investor population, (2) investors who can have heterogeneous expectations or beliefs – an overlooked but required condition for the CAPM to be an internally consistent and meaningful model of competitive financial asset pricing under uncertainty and (3) a positive-sloped short-run supply curve based on a reasonable interpretation of the nature of financial asset trade. Upon a complete economic interpretation, it is shown that the equilibrium (systematic) risk-rate of return relationship depends on whose aggregate trading activity dominates, risk-averse or risk-taking investors’. There is no universal, or even general, positive relationship between systematic risk and rate of return. This has far-reaching implications for investors and investment advisors who serve them.     

中国A股市场个股收益影响因素的实证分析

选取公司市值、账面市值比、净营运资产、市净率和管理费用作为解释变量来构建面板数据模型,利用2007—2011年我国A股市场中573家上市公司的面板数据进行回归分析,探析这些财务指标对中国A股市场的股票月收益率的解释力度。研究结果显示:上述解释变量对股票月度收益率具有显著影响,说明这些财务指标对股票收益的解释力度较强;公司市值和账面市值比与股票收益率正相关,在研究期间存在明显的账面市值比效应;净营运资产、市净率和管理费用与股票收益率负相关;中国股票市场是一个弱式有效市场。     

The cross section of international government bond returns

Volatility risk, credit risk, value effect, and momentum are major return drivers in the fixed-income universe. This study offers a four-factor pricing model for international government bonds. The model thoroughly explains the variation of government bond returns and covers a range of more than 60 cross-sectional return patterns in government bond markets, verifying its usefulness for asset pricing. The research was conducted within a sample of bonds from 25 developed and emerging markets for the years 1992 to 2016.     

Does aggregate uncertainty explain size and value anomalies?

This paper examines the impact of aggregate uncertainty on return dynamics of size and book-to-market ratio sorted portfolios. Using VVIX as a proxy for aggregate uncertainty, and controlling for market risk, volatility risk, correlation risk and the variance risk premium, we document significant portfolio return exposures to aggregate uncertainty. In particular, portfolios that contain small and value stocks have significant and negative uncertainty betas, whereas portfolios of large and growth stocks exhibit positive and significant uncertainty betas. Using a quasi-natural experimental setting around the financial crisis, we confirm the differential sensitivity of small versus big and value versus growth portfolios to aggregate uncertainty. We posit that due to their negative uncertainty betas, uncertainty-averse investors demand extra compensation to hold small and value stocks. Our results offer an uncertainty-based explanation to size and value anomalies.     

An examination of the economic significance of stock return predictability in UK stock returns

We explore the out-of-sample performance of domestic UK asset allocation strategies that use forecasts of expected returns from a linear predictive regression and those that are implied by asset pricing models such as the capital asset pricing model (CAPM) or arbitrage pricing theory (APT). Our findings suggest that using forecasts of expected returns from the predictive regression generate significant benefits in out-of-sample performance. We find the performance of the strategies using expected return forecasts implied by the CAPM or APT is lower than the predictive regression strategy. However, with binding investment constraints, the performance of the APT matches that of the predictive regression.     

Common risk factors in the returns on cryptocurrencies

This paper identifies three common risk factors in the returns on cryptocurrencies, which are related to cryptocurrency market return, market capitalization (size) and momentum of cryptocurrencies. Investigating a collection of 78 cryptocurrencies, we find that there are anomalous returns that decrease with size and increase with return momentum, and the momentum effect is more significant in small cryptocurrencies. Moreover, Fama-Macbeth regressions show the size and momentum combine to capture the cross-sectional variation in average cryptocurrency returns. In the tests of the three-factor model, we find most cryptocurrencies and their portfolios have significant exposures to the proposed three factors with insignificant intercepts, demonstrating that the three factors explain average cryptocurrency returns very well.     

On Characteristics Momentum

This article investigates whether investors can benefit from information about equity style evolution. The study shows that portfolios formed by firm characteristics such as size, book-to-market, and/or dividend yield can be used to determine investment style dominance. Characteristics momentum, buying stocks with persistent in-favor characteristics and selling stocks with persistent out-of-favor characteristics, conveys valuable information about future stock returns. It is distinct and has longer-lasting effects than price or industry momentum in predicting future returns. In explaining the existence of characteristics momentum profits, this study highlights the importance of slow evolution of changes in firm characteristics. The lifecycle of investment styles can thus have predictive power for trend-chasing investors, who can potentially push up the price of stocks with an in-favor style, and depress the price of stocks with an out-of-favor style.     

Single Beta Models and Currency Futures Prices

The conditional capital asset pricing model is applied to foreign currency futures prices, covariance risk being measured relative to excess returns from a broadly diversified international portfolio of equities. Positive time-varying risk premia are found in all five currencies tested when the difference between the US and the average foreign interest rates is used as an instrumental variable for the expected excess return from the common stock portfolio.     

No-arbitrage, state prices and trade in thin financial markets

We examine how non-competitiveness in financial markets affects the choice of asset portfolios and the determination of equilibrium prices. In our model, potential arbitrage is conducted by a few highly specialized institutional investors who recognize and estimate the impact of their trades on financial prices. We apply a model of economic equilibrium, based on Weretka (, 2007a), in which price effects are determined endogenously as part of the equilibrium concept. For the case in which markets allow for perfect insurance, we argue that the principle of no-arbitrage asset pricing is consistent with non-competitive behavior of the arbitragers and extend the fundamental theorem of asset pricing to the non-competitive setting.     

Does corporate governance still affect firm performance after controlling the distress factor?

We explore the impact of corporate governance on firm performance. We first identify whether corporate governance can still be an influential factor or has been largely captured by the traditional Fama-French three-factor model. More importantly, our study adds a financial distress factor to the Fama-French three-factor model to form a four-factor pricing model (labelled as the ‘financial distress four-factor model’). We find that for the US Russell 1000 firms, the financial distress four-factor model is the better model of the two models considered. We further find that the financial distress four-factor model has a higher explanatory power in capturing the return variation. We find that the differences between the return of firms with good (weak) corporate governance and the expected return are insignificantly different from zero for most portfolios in all the two models. The financial distress four-factor model, however, has the fewer portfolios with return difference being significantly different from zero, implying that corporate governance has been better priced in the financial distress factor.     

Uniform testing and portfolio strategies for single and multifactor asset pricing models in the Pacific Basin markets

We test and implement portfolio strategies for three major asset pricing models, under uniform diagnostic measures using the PACAP data set containing all current listing and de-listing of firms for the local stock exchange in several Pacific Basin countries. Compared to the often used MSCI database that include only a subset of the (large) firms in the local markets, the more complete coverage of our database allows for more robust testing of current multifactor asset pricing models since the possible effects of additional factors such as size and book to market may not show up correctly using less comprehensive data sets. Our data set also provides a natural packet of nonUS data for addressing the issue of whether the results of recent asset pricing research are sample specific. Our overall results provide multi-country (sample nonspecific) support for the additional asset pricing risk factors of the Fama-French three-factor model but not for the momentum factor of the Carhart model. We additionally find that the size risk factor is more prominent than value risk factor in the Pacific Basin markets. Finally, we find strong evidence that portfolio strategies implemented to capture value and size effects are profitable in the Pacific Basin stock markets.     

The profitability of momentum trading strategies: Empirical evidence from Hong Kong

This paper investigates whether momentum trading strategies are profitable in the Hong Kong stock market, and examines the sources of such profitability. Momentum portfolios are significantly profitable in the intermediate term in Hong Kong, but the profits become insignificant after risk adjustment by the Chordia and Shivakumar (2001) model. The stock-specific return strategy and factor-related return strategy are analyzed to examine which portion of the total return causes stocks to enter extreme portfolios. The Chordia and Shivakumar factor-related return strategy obtains profits with a magnitude that is close to that which is attained by the total return momentum strategy. Additional evidence further supports the view that the Chordia and Shivakumar model captures momentum profits.