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Conditional multifactor asset pricing model and market anomalies

Saumya Ranjan Dash (Institute of Management Technology (IMT) Ghaziabad, Ghaziabad, India)
Jitendra Mahakud (Indian Institute of Technology Kharagpur, Kharagpur, India)

Journal of Indian Business Research

ISSN: 1755-4195

Article publication date: 4 November 2013

791

Abstract

Purpose

The purpose of this paper is to investigate the firm-specific anomaly effect and to identify market anomalies that account for the cross-sectional regularity in the Indian stock market. The paper also examines the cross-sectional return predictability of market anomalies after making the firm-specific raw return risk adjusted with respect to the systematic risk factors in the unconditional and conditional multifactor specifications.

Design/methodology/approach

The paper employs first step time series regression approach to drive the risk-adjusted return of individual firms. For examining the predictability of firm characteristics on the risk-adjusted return, the panel data estimation technique has been used.

Findings

There is a weak anomaly effect in the Indian stock market. The choice of a five-factor model (FFM) in its unconditional and conditional specifications is able to capture the book-to-market equity, liquidity and medium-term momentum effect. The size, market leverage and short-run momentum effect are found to be persistent in the Indian stock market even with the alternative conditional specifications of the FFM. The results also suggest that it is naï argue for disappearing size effect in the cross-sectional regularity.

Research limitations/implications

Constrained upon the data availability, certain market anomalies and conditioning variables cannot be included in the analysis.

Practical implications

Considering the practitioners' prospective, the results indicate that the profitable investment strategy with respect to the small size effect is still persistent and warrants close-ended mutual fund investment portfolio strategy for enhancing the long-term profitability. The short-run momentum effect can generate potential profits given a short-term investment horizon.

Originality/value

This paper provides the first-ever empirical evidence from an emerging stock market towards the use of alternative conditional multifactor models for the complete explanation of market anomalies. In an attempt to analyze the anomaly effect in the Indian stock market, this paper provides further evidence towards the long-short hedge portfolio return variations in terms of a wide set of market anomalies that have been documented in prior literature.

Keywords

Acknowledgements

The authors are highly thankful to the suggestions of anonymous referee for the valuable suggestions.

Citation

Ranjan Dash, S. and Mahakud, J. (2013), "Conditional multifactor asset pricing model and market anomalies", Journal of Indian Business Research, Vol. 5 No. 4, pp. 271-294. https://doi.org/10.1108/JIBR-12-2012-0126

Publisher

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Emerald Group Publishing Limited

Copyright © 2013, Emerald Group Publishing Limited

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