Journal of Management Research

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A Comparative Assessment of Unconditional Multifactor Asset-pricing Models


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1 Department of Humanities and Social Sciences IIT Kharagpur- 721 302, India
     

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The basic objective of this paper is to evaluate three alternative unconditional multifactor models to explain the cross-sectional stock return behavior in the context of Indian stock market. Fama and French time series regression approach is applied to examine the impact of market risk premium, size, bookto- market equity, momentum, and liquidity as risk factors on stock return. The empirical results show that three factor proposed by Fama and French (1993) retain their significance to explain the crosssection of stock return for test asset portfolios constructed beyond size and book-to-market equity characteristics. This finding is also robust to the inclusion of momentum and liquidity factors in four and five-factor model specifications. However, inconsistent with prior literature, book-to-market equity fails to explain the average return in case of large stocks. In the case of four-factor model, we found that pricing evidence of momentum profits fades in case of winner stocks and momentum strategy retains its value only for the sell side transactions i.e., loser portfolios. When the tests allow for the inclusion of liquidity factor in an augmented four-factor model, the results suggest that liquidity is priced and explains a cross-sectional variation in stock returns. The findings suggest that given the multi-dimensional nature of risk the choice of a five-factor model is apparently persuasive for consideration in investment decisions.

Keywords

Risk Factor, Multi-factor Model, Liquidity Risk, Momentum Strategy, Stock Return
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  • A Comparative Assessment of Unconditional Multifactor Asset-pricing Models

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Authors

Saumya Ranjan Dash
Department of Humanities and Social Sciences IIT Kharagpur- 721 302, India
Jitendra Mahakud
Department of Humanities and Social Sciences IIT Kharagpur- 721 302, India

Abstract


The basic objective of this paper is to evaluate three alternative unconditional multifactor models to explain the cross-sectional stock return behavior in the context of Indian stock market. Fama and French time series regression approach is applied to examine the impact of market risk premium, size, bookto- market equity, momentum, and liquidity as risk factors on stock return. The empirical results show that three factor proposed by Fama and French (1993) retain their significance to explain the crosssection of stock return for test asset portfolios constructed beyond size and book-to-market equity characteristics. This finding is also robust to the inclusion of momentum and liquidity factors in four and five-factor model specifications. However, inconsistent with prior literature, book-to-market equity fails to explain the average return in case of large stocks. In the case of four-factor model, we found that pricing evidence of momentum profits fades in case of winner stocks and momentum strategy retains its value only for the sell side transactions i.e., loser portfolios. When the tests allow for the inclusion of liquidity factor in an augmented four-factor model, the results suggest that liquidity is priced and explains a cross-sectional variation in stock returns. The findings suggest that given the multi-dimensional nature of risk the choice of a five-factor model is apparently persuasive for consideration in investment decisions.

Keywords


Risk Factor, Multi-factor Model, Liquidity Risk, Momentum Strategy, Stock Return

References