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Book part
Publication date: 21 August 2019

Hsuan-Yu Liu and Cindy S. H. Wang

This chapter re-examines the Fama–French (FF) five-factor asset pricing model proposed by Fama and French (2015), since this model has a failure to capture the lower…

Abstract

This chapter re-examines the Fama–French (FF) five-factor asset pricing model proposed by Fama and French (2015), since this model has a failure to capture the lower average returns on small stocks and its performance could not fully satisfy the original definitions of those considered factors. From the viewpoint of the econometrics analysis, we consider the inferior performance could be potentially caused by the spurious effect in the five-factor model, which could mislead the statistical inference and yield biased empirical results. We thus employ the CO-AR estimation by Wang and Hafner (2018) to prove the usefulness of the FF five-factor model. Empirical results demonstrate with the CO-AR estimation, the five-factor model indeed properly captures the lower average returns on small stocks and illustrate the sustainability of efficiency of the market, which is in contrast to the findings of Fama and French (2015). However, we propose a new perspective on the seminal five-factor model.

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Advances in Pacific Basin Business, Economics and Finance
Type: Book
ISBN: 978-1-78973-285-6

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Article
Publication date: 6 July 2010

Keiichi Kubota and Hitoshi Takehara

The purpose of this paper is to determine the best conditional asset pricing model for the Tokyo Stock Exchange sample by utilizing long‐run daily data. It aims to…

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Abstract

Purpose

The purpose of this paper is to determine the best conditional asset pricing model for the Tokyo Stock Exchange sample by utilizing long‐run daily data. It aims to investigate whether there are any other firm‐specific variables that can explain abnormal returns of the estimated asset pricing model.

Design/methodology/approach

The individual firm sample was used to conduct various cross‐sectional tests of conditional asset pricing models, at the same time as using test portfolios in order to confirm the mean variance efficiency of basic unconditional models.

Findings

The paper's multifactor models in unconditional forms are rejected, with the exception of the five‐factor model. Further, the five‐factor model is better overall than the Fama and French model and other alternative models, according to both the Gibbons, Ross, and Shanken test and the Hansen and Jagannathan distance measure test. Next, using the final conditional five‐factor model as the de facto model, it was determined that the turnover ratio and the size can consistently predict Jensen's alphas. The book‐to‐market ratio (BM) and the past one‐year returns can also significantly predict the alpha, albeit to a lesser extent.

Originality/value

In the literature related to Japanese data, there has never been a comprehensive test of conditional asset pricing models using the long‐run data of individual firms. The conditional asset pricing model derived for this study has led to new findings about the predictability of past one‐year returns and the turnover ratio.

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Managerial Finance, vol. 36 no. 8
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 11 September 2017

Greg Richey

The purpose of this paper is to investigate the return performance of a portfolio of US “vice stocks,” firms that manufacture and sell products such as alcohol, tobacco…

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1019

Abstract

Purpose

The purpose of this paper is to investigate the return performance of a portfolio of US “vice stocks,” firms that manufacture and sell products such as alcohol, tobacco, gaming services, national defense and firearms, adult entertainment, and payday lenders.

Design/methodology/approach

Using daily return data from a portfolio of vice stocks over the period 1987-2016, the author computes the Jensen’s α (capital asset pricing model (CAPM)), Fama-French Three-Factor, Carhart Four-Factor, and Fama-French Five-Factor results for the complete portfolio, and each vice industry individually.

Findings

The results from the CAPM, Fama-French Three-Factor Model, and the Carhart Four-Factor Model show a positive and significant α for the vice portfolio throughout the sample period. However, the α’s significance disappears with the addition of the explanatory variables from the Fama-French Five-Factor Model.

Originality/value

The author provides academics and practitioners with results from a new model. As of this writing, the author is unaware of any articles published in peer-reviewed academic journals that investigate vice stocks within the framework of the Fama-French Five-Factor Model (2015). First, the existing literature does not shed light on the relationship between “profitability” and “aggressiveness” (the fourth and fifth factors of the Fama-French Model) and vice stock returns. Second, within the framework of the Fama-French Five-Factor Model, the author shows results not only from a portfolio of vice stocks, but from various vice industries as well.

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Managerial Finance, vol. 43 no. 9
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 10 September 2018

Moinak Maiti and A. Balakrishnan

The purpose of this paper is to focus on one of the major emerging Asian economies – India – to examine the role of human capital in asset prices.

Abstract

Purpose

The purpose of this paper is to focus on one of the major emerging Asian economies – India – to examine the role of human capital in asset prices.

Design/methodology/approach

The analysis uses various statistical techniques (e.g. multifactor regression model, 3D graphs, GRS test and residual graphs) to test the role of human capital in asset prices.

Findings

A six-factor model designed for capturing the size, value, profitability, investment and human capital patterns in average portfolio returns performs better than both Fama–French’s (1993) three- and Fama–French’s (2015) five-factor model. The main problem of six-factor model is its failure in capturing the average returns on “microcap with low-value stocks that are highly profitable invests aggressively for asset growth but invests much lesser for human growth” and “microcap with unprofitable stocks whose returns behave like those of low-value firms with conservative investment”. The study finds the investment factor (CMA) of Fama–French’s (2015) five-factor model as the redundant factor for describing the portfolio average returns in the study sample.

Research limitations/implications

The paper argues that human capital also plays a role in predicting returns. This has significant public policy content.

Originality/value

The present study is novel for several reasons: first, it includes six-factor model descriptions; second, no comprehensive asset pricing study is done with human capital in Asian emerging markets, especially in India. Perhaps, this is the first study to examine whether portfolio returns are affected by the human capital in the Indian context. Third, the study period and methodology used are completely different from the previous studies.

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Journal of Economic Studies, vol. 45 no. 4
Type: Research Article
ISSN: 0144-3585

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Article
Publication date: 18 June 2021

Mehak Jain and Ravi Singla

Asset pricing revolves around the core aspects of risk and expected return. The main objective of the study is to test different asset pricing models for the Indian…

Abstract

Purpose

Asset pricing revolves around the core aspects of risk and expected return. The main objective of the study is to test different asset pricing models for the Indian securities market. This paper aims to analyse whether leverage and liquidity augmented five-factor model performs better than Capital Asset Pricing Model (CAPM), Fama and French three-factor model, leverage augmented four-factor model and liquidity augmented four-factor model.

Design/methodology/approach

The data for the current study comprises records on prices of securities that are part of the Nifty 500 index for a time frame of 14 years, that is, from October 2004 to September 2017 consisting of 183 companies using time series regression.

Findings

The results indicate that the five-factor model performs better than CAPM and the three-factor model. The model outperforms leverage augmented and liquidity augmented four-factor models. The empirical evidence shows that the five-factor model has the highest explanatory power among the entire asset pricing models considered.

Practical implications

The present study bears certain useful implications for various stakeholders including fund managers, investors and academicians.

Originality/value

This study presents a five-factor model containing two additional factors, that is, leverage and liquidity risk along with the Fama-French three-factor model. These factors are expected to give more value to the model in comparison to the Fama-French three-factor model.

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Vilakshan - XIMB Journal of Management, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0973-1954

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Article
Publication date: 30 April 2021

Rajesh Kumar Bhaskaran and Sujit Kovilathumpaday Sukumaran

The current study proposes an integrative framework for examination of determinants of stock returns in US market based on the five-factor Fama and French (FF) model

Abstract

Purpose

The current study proposes an integrative framework for examination of determinants of stock returns in US market based on the five-factor Fama and French (FF) model, macroeconomic variables and investor sentimental factors. The study is based on both value weighted and equally weighted monthly portfolio returns of all CRSP firms which are incorporated in the United States and listed on the NYSE, AMEX or NASDAQ.

Design/methodology/approach

The study applies PLS-SEM methodology to examine the major determinants of portfolio return.

Findings

The study suggests that investor sentiments are the major driving forces which positively influence the portfolio stock returns. The macroeconomic factors, the FF Factors and Momentum factor have negative influences on portfolio stock returns.

Originality/value

The study is the first of its kind which aim to determine the determinants of portfolio returns using the PLS-SEM methodology.

Details

Review of Behavioral Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1940-5979

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Article
Publication date: 3 June 2019

Salman Ahmed Shaikh, Mohd Adib Ismail, Abdul Ghafar Ismail, Shahida Shahimi and Muhammad Hakimi Mohd. Shafiai

This paper aims to study the cross section of expected returns on Shari’ah-compliant stocks in Pakistan by using single- and multi-factor asset pricing models.

Abstract

Purpose

This paper aims to study the cross section of expected returns on Shari’ah-compliant stocks in Pakistan by using single- and multi-factor asset pricing models.

Design/methodology/approach

To estimate cross section of expected returns of Shari’ah-compliant stocks, the study uses capital asset pricing model (CAPM), Fama-French three-factor model and Fama-French five-factor model. Data for the period 2001-2015 on 217 companies are used. For the market portfolio, PSX-100 and Dow Jones Islamic Index for Pakistan are used.

Findings

The study could not find empirical support for CAPM using Lintner (1965), Black et al. (1972) and Fama and Macbeth (1973) approach. Nonetheless, the relation between beta and returns is positive in up-market and negative in down-market. The results of Fama-French three-factor and five-factor models suggest that size premium is positive and significant for explaining the cross section of stock returns of small size stocks, whereas value premium is positive and significant for explaining the cross section of returns of high value stocks.

Practical implications

The results suggest that fund managers can use Shari’ah-compliant stocks for portfolio diversification and for offering specialized investments given the positive market excess returns and the existence of size and value premium on Shari’ah-compliant stocks.

Originality/value

This is the first study on Fama-French (2015) five-factor model for Islamic capital markets in Pakistan.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 12 no. 2
Type: Research Article
ISSN: 1753-8394

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Article
Publication date: 23 June 2020

Xiaoying Chen and Nicholas Ray-Wang Gao

Since the introduction of VIX to measure the spot volatility in the stock market, VIX and its futures have been widely considered to be the standard of underlying investor…

Abstract

Purpose

Since the introduction of VIX to measure the spot volatility in the stock market, VIX and its futures have been widely considered to be the standard of underlying investor sentiment. This study aims to examine how the magnitude of contango or backwardation (MCB volatility risk factor) derived from VIX and VIX3M may affect the pricing of assets.

Design/methodology/approach

This paper focuses on the statistical inference of three defined MCB risk factors when cross-examined with Fama–French’s five factors: the market factor Rm–Rf, the size factor SMB (small minus big), the value factor HML (high minus low B/M), the profitability factor RMW (robust minus weak) and the investing factor CMA (conservative minus aggressive). Robustness checks are performed with the revised HML-Dev factor, as well as with daily data sets.

Findings

The inclusions of the MCB volatility risk factor, either defined as a spread of monthly VIX3M/VIX and its monthly MA(20), or as a monthly net return of VIX3M/VIX, generally enhance the explanatory power of all factors in the Fama and French’s model, in particular the market factor Rm–Rf and the value factor HML, and the investing factor CMA also displays a significant and positive correlation with the MCB risk factor. When the more in-time adjusted HML-Dev factor, suggested by Asness (2014), replaces the original HML factor, results are generally better and more intuitive, with a higher R2 for the market factor and more explanatory power with HML-Dev.

Originality/value

This paper introduces the term structure of VIX to Fama–French’s asset pricing model. The MCB risk factor identifies underlying configurations of investor sentiment. The sensitivities to this timing indicator will significantly relate to returns across individual stocks or portfolios.

Details

The Journal of Risk Finance, vol. 21 no. 3
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 23 April 2020

Muhammad Arslan

Recently, sustainable supply chain management (SSCM) has generated significant interest and gained attention of practitioners and academics. The purpose of this paper is…

Abstract

Purpose

Recently, sustainable supply chain management (SSCM) has generated significant interest and gained attention of practitioners and academics. The purpose of this paper is to explore different themes in the existing literature, which pertains to social sustainability (SS) in supply chains, to argue for the use of SS model and suggest further research directions.

Design/methodology/approach

In the study, the authors have undertaken extensive literature review (n = 171) and used thematic analysis to propose a model.

Findings

Through the extensive review and thematic analysis, the paper identifies eight themes, which include stakeholder pressure, sustainability culture, contingencies, sustainability practices, partnerships, drivers and barriers, sustainability performance and optimization, and develops a SS model called “five-factor sustainability model.” Furthermore, a list of potential research directions for five-factor sustainability model is discussed.

Research limitations/implications

The research is an attempt to explore different themes related to SS in supply chain and develop a model that is also applicable to economic and environmental sustainability.

Originality/value

The paper offers a new approach to SSCM literature, arguing for five-factor sustainability model and providing further research directions. Moreover, this model will help sustainability scholars to position and integrate their research within social, economic and environmental sustainability literature.

Details

Journal of Global Responsibility, vol. 11 no. 3
Type: Research Article
ISSN: 2041-2568

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Article
Publication date: 7 November 2016

Zhonghua Zhang, John Chi-Kin Lee and Ping Ho Wong

The purpose of this paper is to address the statistical issues associated with the hierarchically structured data in previous studies that focused on servant leadership…

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1687

Abstract

Purpose

The purpose of this paper is to address the statistical issues associated with the hierarchically structured data in previous studies that focused on servant leadership. To resolve these issues, multilevel modeling methods were applied to re-visit the construct validity of the servant leadership questionnaire developed by Barbuto and Wheeler (2006) and investigate the relationship between servant leadership and job satisfaction under a multilevel framework.

Design/methodology/approach

The survey data was obtained from a sample of 2,089 teachers from 117 primary and secondary schools in Hong Kong. The analyses were conducted using multilevel confirmatory factor analysis (MLCFA) and multilevel structural equation modeling (MLSEM).

Findings

The results revealed the significant and non-trivial variances that were explained at the organization level in the items measuring servant leadership, which justified the use of MLCFA and MLSEM. The results of MLCFA provided empirical support for the multidimensional construct as well as the second-order factorial structure of servant leadership measures at both the individual and organization levels. In addition, the positive relationships between servant leadership and the followers’ job satisfaction were found to vary at different levels.

Originality/value

This study reiterates the importance of using appropriate methods to capture a solid definition of the construct of servant leadership and provides new insights into the conceptual framework of servant leadership as well as the effects of servant leadership on individual and organizational outcomes.

Details

Leadership & Organization Development Journal, vol. 37 no. 8
Type: Research Article
ISSN: 0143-7739

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