Carhart Model Research Articles

Application and Empirical Analysis of Asset Pricing Models in the Chinese Stock Market

This paper examines the application and performance of asset pricing models in the Chinese stock market. We analyze the Capital Asset Pricing Model (CAPM), the Fama-French Three-Factor Model, and the Carhart Four-Factor Model, assessing their effectiveness in explaining stock returns within the context of China's unique market environment. Using data from major Chinese stock exchanges, we employ regression analysis to evaluate the models. Our findings reveal that multifactor models, particularly the Carhart model, provide superior explanatory power compared to CAPM, highlighting the importance of incorporating additional risk factors. This study contributes to the understanding of asset pricing in emerging markets and offers practical insights for investors and policymakers.

Performance of Green vis-à-vis Red EU securities

ABSTRACT This research compares the performance of Green (eco-friendly) versus Red (eco-enemy) returns for EU securities. Green securities are the stocks of companies whose primary business activities focus on being relatively beneficial to the environment, while Red stocks are associated with business activities that are harmful to the environment. The study investigates their performance from January 2000 to December 2019, before and after the Global financial crisis in 2009. The methodology follows two parts in order to distinguish the financial performance between Green and Red stocks. The first part applies the asset pricing models from the Fama-French and the Carhart models and their extensions for every security and estimates the alpha performance; the second continues with a cross-sectional regression to compare the asset classes. The findings indicate that there is no statistically significant difference in financial performance between Red and Green securities.

Does Momentum Matter? Modeling Stock Returns through Fama-French and Carhart Model for Pakistan Stock Exchange

Does Momentum Matter? Modeling Stock Returns through Fama-French and Carhart Model for Pakistan Stock Exchange

Factor models and investment strategies in the renewable energy sector

The growing concern about the natural environment is getting relevance not only on institutional investors but also on individual ones. However, these retail investors face some difficulties, such as the fact that they are often not able to monitor many assets but they are also unable to use most of the methodology proposed in the empirical evidence because it is not feasible for them. We avoid these problems by proposing an investment strategy based on the different values of the alpha and beta coefficients from the Fama-French and Carhart models. We use Exchange Traded Funds (ETFs) which track companies involved on clean and renewable energy businesses and it is provided evidence that in most of the cases the best investment strategy is to follow the positive and significant values of the alphas from the estimated models and to hold the portfolio for a short period of time. Additionally, we also report that the signals from the coefficients associated to the value factor (HML) must not be undervalued. Finally, we demonstrate that wind, clean energy and solar energy sectors are the most important renewable energies for investors. These findings reinforce the importance of investing on renewable companies using ETFs.

Analyzing the Performance of Pakistan Equity Mutual Funds Using Multifactor Models: Pre-COVID Analysis

Previous literature has primarily focused on examining the determinants that impact mutual fund returns in developed and emerging economies. However, there is a dearth of empirical research on how multifactor models are associated with mutual fund returns in underdeveloped economies. The inconsistent literature regarding the efficiency of the literature posed a question of whether the fund managers can generate extra returns for the investors. To address this research gap, this study aims to analyze mutual fund returns using multifactor models, specifically the Capital Asset Pricing Model (CAPM), Fama-French three-factor model, Carhart four-factor model, Treynor-Mazuy and Fama Net-Selectivity. The first three models analyze the funds with four factors: market factor, growth factor, value factor and momentum factor. The results of the study indicate that the risk premium factor plays a crucial role in understanding mutual fund returns, as it exhibits significant value across all three models. However, the value and size factors were found to be insignificant in both the Fama-French and Carhart models. Additionally, the momentum factor was not significant in the Carhart model. Notably, the significant alpha observed in all multifactor models suggests the skill of mutual fund managers, which was further confirmed using the Treynor-Mazuy and Fama Net-Selectivity models to assess their timing and selectivity abilities in actively managed funds. Furthermore, the finding of the study suggests the inefficiency of the market. The investors could earn extra return from their investments. However, the managers play important role in generating the abnormal returns as suggested by Treynor-Mazuy and Fama Net-selectivity model significance. In addition to that, investors should consider the market risk premium in their investment returns.

PREDICTING PAKISTANS’ MUTUAL FUND PERFORMANCE: AN EVALUATION OF TRADITIONAL AND MODERN MEASURES

Mutual Funds enable small investors to benefit from the capital market with minimal investments, thanks to the expertise of professional managers. This study focuses on the Pakistani Mutual Fund industry and evaluates the suitability of traditional and multifactor asset pricing models in assessing Mutual Fund performance. Since multifactor models are rarely used in Pakistani research, this study employs the CAPM, Fama French, and Carhart models to assess the performance of Pakistan Mutual Funds. Data from 100 open-end Mutual Funds between 2005 and 2017 was collected from the Mutual Fund Association of Pakistan, while risk-free rates data was gathered from the State Bank of Pakistan and stock data from the Pakistan Stock Exchange. Ratio analysis, CAPM, Fama French-3 Factor, and Carhart-4 Factor models were used to analyze the data and determine which model was most suitable. The results indicate that the CAPM affects the market factors of the majority of portfolios. Conversely, the size factor, value factor, and momentum factor in the Fama French and Carhart models have an insignificant effect on the majority of portfolios. The Gibbon Rose Shanken test reveals that the CAPM model is the most suitable for evaluating Mutual Fund performance in Pakistan. The findings of this study have implications for asset management company managers and investors alike. It provides valuable insights into which funds perform better and which types of funds are ideal for investment.

Assessing the Use of Gold as a Zero-Beta Asset in Empirical Asset Pricing: Application to the US Equity Market

This paper examines the use of the return on gold instead of treasury bills in empirical asset pricing models for the US equity market. It builds upon previous research on the safe-haven, hedging, and zero-beta characteristics of gold in developed markets and the close relationship between interest rates, stock, and gold returns. In particular, we extend this research by showing that using gold as a zero-beta asset helps to improve the time-series performance of asset pricing models when pricing US equities and industries between 1981 and 2015. The performance of gold zero-beta models is also compared with traditional empirical factor models using the 1-month Treasury bill rate as the risk-free rate. Our results indicate that using gold as a zero-beta asset leads to higher R-squared values, lower Sharpe ratios of alphas, and fewer significant pricing errors in the time-series analysis. Similarly, the pricing of small stock and industry portfolios is improved. In cross-section, we also find improved results, with fewer cross-sectional pricing errors and more economically meaningful pricing of risk factors. We also find that a zero-beta gold factor constructed to be orthogonal to the Carhart four factors is significant in cross-section and helps to improve factor model performance on momentum portfolios. Furthermore, the Fama–French three- and five-factor asset pricing models and the Carhart model are all improved by these means, particularly on test assets which have been poorly priced by the traditional versions. Our results have salient implications for policymakers, governments, central bank rate-setting decisions, and investors.

In Search of Sustainability and Financial Returns: The Case of ESG Energy Funds

The world is facing several challenges, and the problem of sustainable development is one of the most important. It is worth considering that European countries are playing a significant role as pioneers in building a sustainable world, such as those promises made by signing the Paris Agreement and European Taxonomy. To achieve ambitious targets within sustainable development, a huge amount of capital is necessary, while financial and capital market participants are expected to demonstrate a high level of engagement in the domain of sustainability. Facing growing interest and demand, a relatively new product—the ESG (environmental, social, and governance) investment fund—was introduced. Scientific literature is providing some controversial views regarding the overall evaluation of this product. Therefore, additional research providing different angles would contribute to a better understanding. This study examines European ESG funds in the energy sector, from the perspective of news flows and investors. It is worth noting that the authors use the word “European” to refer to members of the European Union (EU). The paper consists of the following parts. In the introduction, the current state of this issue is discussed. The following section offers a literature review and a news flow analysis that contributes to a deeper understanding of these issues. A description of the methodology applied for the data analysis follows this, and the final section presents the research results and conclusions. The authors apply statistical analysis and the Carhart model to determine the differences in the performance of the ESG and conventional funds and use their own tool for text analysis to examine the relevance of the topic of ESG to attract client interest. The authors claim that the performance of the European ESG equity funds do not show a statistically significant difference from the non-ESG equity funds in the majority of the periods examined. The application of the adjusted Carhart model demonstrates that the factor of sustainability has a non-significant and negative effect on the fund performance. Finally, the authors highlight the urgent necessity for the unified usage of keywords and terminology, such as “ESG”, “sustainability”, etc., to ensure comparison and attribution possibilities.

Cash holding and performance analysis of mutual funds: a case of an emerging financial market

PurposeThis study is about the determinants of cash holding and impact of cash holding on mutual funds’ performance. In addition, the study analyzes the impact of performance-related determinants of cash holding on funds' performance.Design/methodology/approachPanel data of ten years of 190 open-end mutual funds are analyzed through fixed effect regression technique. The risk-adjusted funds' performance of cash based portfolios is computed through capital asset pricing model (CAPM) (1964), Fama and French (1993) and Carhart (1997) models.FindingsThe results indicate that small size funds, high charging front-end load funds, high turnover ratio funds, high 12-month fund returns run up, high dividend paying funds and high redemption level funds hold more cash for precautionary purpose to avoid costs of cash short-falls. Further, monthly average raw returns and risk-adjusted performance of funds with the lowest raw and residual cash holding are found higher than the funds with the highest cash holding. An increase in cash is found to dilute performance.Originality/valueThis is a pioneer study in a corporate environment with shallow capital market, reliance of businesses on bank credit, firms exposed to agency issues, wealth expropriations and existence of business groups with political linkages but with opportunities of investments due to expected favorable geo-socio-political situation. The study generates outcomes relevant for other similar economies.

The performance of retail investors, trading intensity and time in the market: evidence from an emerging stock market

We analyze all stock transactions executed by the universe of individual (or retail) investors of the Colombian Stock Exchange (5,380,810 trades performed by 42,211 individual investors between 2006 and 2016). Retail investors had negative abnormal returns on a gross excess return basis that ranged between 4% and 4.4% per year (depending on whether the alpha was estimated using the CAPM, Fama-French model or Carhart model). When transaction costs are considered, the underperformance of retail investors becomes even more pronounced, and the most active traders perform worse than less active traders even on a gross excess return basis. The underperformance of retail investors can be explained by their bad timing but only prior to the bankruptcy of Interbolsa, the largest stock brokerage house in Colombia at the time (2012). Once we control for the number of trades and other variables, we find that retail investors present in the market for a longer period of time and trading more actively outperform the other investors (on both a gross and net basis).

Mutual Fund Performance Persistence and Competition: Pakistan’s Open Ended Mutual Fund Performance Analysis

Mutual Funds through its professional managers enable small investors to enjoy benefits of capital market with small amount. This study with special focus on Pakistani Mutual Fund industry, tests the suitability of traditional measures and multifactor, asset pricing models on the Mutual Fund performance. Owing to rareness of the applicability of the multifactor models in comparison to traditional measures, in evaluating Mutual Fund performance in modern day Pakistani research, the study uses CAPM, Fama French, Carhart models in the performance evaluation of Pakistan Mutual Fund. The data of 100 open-end Mutual Funds, for the period 2005 to 2017 was collected from Mutual Fund Association of Pakistan; while the risk free rates data was collected from State Bank of Pakistan and Stock data from Pakistan Stock Exchange for predicting the results, Ratio analysis, CAPM, Fama French-3 Factor and Carhart-4 factor model were used to understand its suitability. The results demonstrated that application of CAPM, affect market factors of majority of the portfolios.Where as in other two models (Fama French, Carhart) the majority of the portfolios are insignificantly affected by the size factor, value factor and Momentum factor. The Gibbon Rose Shanken unveils the suitability of the best model and justify CAPM as the better model among the three competing models in evaluate on theMutual Fund performance in Pakistan. The study has certain implications for the managers of assets management companies as well as useful for the investors in knowing which funds perform better and which kind of funds are ideal for investment.

Exploring risk premium factors for country equity returns

In this paper, we study a comprehensive set of risk premia of country equity returns for 45 countries over the sample period 2002 - 2018 in both a single and a multiple factor setting. Using a new three-pass estimation method for factor risk premia by Giglio and Xiu (2021), we find that several factors, including default risk, are also priced in country equity excess returns, controlled by the Fama–French 5-factor and Carhart models. Moreover, we apply a novel approach to investigate the multi-factor impact on country equity returns. We find that the multi-factor information, constructed from the first principal component of the statistically significant single factors, provides a consistent and stronger prediction of anomalies in country equity returns.

Examining Asset Pricing Anomalies: Evidence from Europe

We examine five important asset pricing anomalies, namely, size, value, momentum, profitability, and investment rate to evaluate their efficacy in major West European economies, that is, France, Germany, Italy, and Spain. We employ four prominent asset pricing models, namely Capital Asset Pricing Model (CAPM), Fama–French three-factor (FF3) model, Carhart model and Fama–French five-factor (FF5) model to evaluate whether portfolio managers can create trading strategies to generate risk-adjusted extra normal returns for their investors. We also examine the prominent anomalies which pass the test of asset pricing in our sample countries and evaluate the best performing asset pricing model in explaining returns in each of these countries. We find that in spite of being matured markets, these countries provide portfolio managers with opportunities to exploit these strategies to generate extra normal returns for their investors. Momentum anomaly for Germany and profitability anomaly for Italy can be exploited by fund managers for generating risk-adjusted returns. For France, except for net investment rate anomaly, all the other anomalies remained unexplained by asset pricing models. We also find CAPM to be the better model in explaining returns of Italy and Spain. While FF3 factor and FF5 factor models explain returns in Germany, our sample asset pricing models failed to work for France. Our study has implications for portfolio managers, academia, and policymakers.

Equity market anomalies in major European economies

This paper investigates five leading equity market anomalies – size, value, momentum, profitability, and asset growth, for four Western European markets, namely, Germany, France, Italy and Spain, from January 2002 to March 2018. The study tests whether these anomalies reverse under different macro-economic uncertainty conditions, and evaluates if strategies based on time diversification can be formed using these equity market anomalies. Market anomalies were tested using four major asset pricing models – the Capital Asset Pricing Model, the Fama-French three-factor model, the Carhart model, and the Fama-French five-factor model. Macro-economic uncertainty was tested using two proxies, namely VIX and default premiums. Time diversified strategies were examined by estimating Sharpe ratios of combined portfolios formed by combining winner univariate portfolios. Value effect in Germany, Size effect in France and Profitability effect in Italy and Spain provide the highest unadjusted returns on long side strategies. No significant reversal of these anomalies was found under different macroeconomic uncertainties. Asset pricing tests show that CAPM works well for Spain and Italy, while Carhart’s model explains returns in Germany. The Fama-French five factor model does not seem to be a good descriptor of asset pricing for data. No suitable model for explaining asset returns is identified for France. Finally, it is observed that some of the equity market anomalies seem to be countercyclical and therefore provide time diversification opportunities. The study has implications for academicians, investors, and policy makers by providing insights for developing profitable investment strategies and highlighting the efficacy of alternative models as performance benchmarks.

THE FOUR-FACTOR MODEL AND STOCK RETURNS IN BANGLADESH

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.

Analysing the financial performance of sustainable development goals-themed mutual funds in China

Abstract More and more Chinese investors are investing in mutual funds linked to a specific United Nations sustainable development goal (UN-SDG) supporting themes such as good health and wellbeing (healthcare mutual funds), affordable and clean energy (renewable energy mutual funds), innovation (technology mutual funds), responsible consumption and production (ethical mutual funds), or life on land (natural resources mutual funds) with the aim to increase their wealth. Therefore, it is important to analyse the financial performance of SDG-themed mutual funds in China. This study is the first in examining whether Chinese mutual funds investing in a specific sector related to the UN-SDGs can beat the domestic-market index diversified across industries. High financial performance would attract more investors and allow firms to capture private financial resources to develop innovative projects that contribute to achieving the SDGs. To this end, this study analyses a sample of 111 Chinese SDG-themed equity mutual funds over the 2009-2019 period, applying several financial performance measures from Jensen's model, Fama and French's model, and Carhart's model. Furthermore, it compares the financial performance of different categories by implementing Student's t-parametric tests for the independent samples and the Mann-Whitney U non-parametric tests for the independent samples. The results indicate that the Carhart's model is superior in explaining mutual fund financial performance than the other two models. In general, SDG-themed mutual funds achieve a similar financial performance to that of the market benchmarks; and these results are robust to several asset pricing models. The results also show that the energy mutual funds significantly underperform the biotechnology, healthcare, agribusiness, technology, and ethical mutual funds in China. Contrastingly, the healthcare mutual funds are shown to outperform the energy, technology, and ethical mutual funds, while other categories exhibit similar financial performances. Furthermore, we find that SDG-themed mutual funds investing in the China geographical market perform like those investing in the global and the United States geographical markets. In conclusion, most SDG-themed mutual funds achieve risk-adjusted returns that are not significantly different from the market benchmarks. Therefore, those who invest in SDG-themed mutual funds could achieve good long-term financial performance while satisfying their non-financial preferences.

Performance and Factor Structure of Green, Grey and Red Securities

The purpose of this research is to determine the factors that are important in explaining the Green (eco-friendly), Grey (neutral), and Red (eco-enemy) EU securities returns. This study investigates the factors that influence performance over time, before and after the crisis (breakpoint, 2009) — the analysis is divided into two parts. In the first part, we study the factor structure of our specific universe stocks in each category, and in the second part, we distinguish the financial performance between Green and Red stock. We define Green stocks, those in the primary business that are relatively beneficial to the environment, and Red as, harmful to the environment. Our analysis applies the asset pricing models from the Fama-French Model (3-factor model and 5-factor model) and the Carhart Model (4-factor model) and two-step regression for the comparison models. The research findings show that our asset class underperforms relative to the applied signals from the market index and the other macro-factors. Moreover, the exposures from the global factors are changing from period to period, which shows the depression affected the asset class's sensitivity. However, we observed that the Grey and Red assets were affected more than the Green ones after the slump. Lastly, our firm evidence shows that the Red securities initiate a superior performance compared to Green securities.

On the robustness of the Fama-French three-factor and the Carhart four-factor models on the Amman Stock Exchange

This study aims to explore the robustness of the applicability of the Fama-French and the Carhart asset pricing models on the Amman Stock Exchange (ASE) equity market. It uses data on all companies listed and traded in the ASE, over the period of 2002 to 2018. The study uses the time-series regression approach of Black et al. (1972). To estimate the models, the study applies the ordinary least squares (OLS) method. The study found that the models fail to capture the cross-section of average returns to portfolios sorted on size/book-to-market as well as size/momentum. The ability of the Carhart model in describing the returns to size/book-to-market portfolios is similar to that of the Fama-French model; however, the model better describes the returns to size/momentum portfolios. Unlike Al-Mwalla's (2012) conclusion, this study suggests using the Carhart model in practical applications that require the estimation of the ASE equity market returns.

경기국면과 운용스타일이 펀드성과에 미치는 영향: Jensen모형, Fama-French모형, Carhart모형을 이용

펀드성과는 펀드의 실제수익률과 벤치마크 수익률의 차이로 측정하는데, 위험조정수익률인 알파(alpha)를 말한다. 벤치마크 수익률은 자본자산가격결정모형을 기반으로 하는 Jensen모형 (1968) 및 다요인모형을 기반으로 하는 Fama-French모형(1993)과 Carhart모형(1997)으로 추정 하는 것이 일반적이다. 이들 세 모형은 베타가 변하지 않고 일정하다고 가정하고 있으나, 최근에는 경기상황에 따라 베타가 변동하며 따라서 펀드성과도 변동하는 것이 발견되었다. 또한 같은 경기상황에서도 펀드의 운용스타일에 따라 펀드성과가 다르게 나타나는 현상이 보고되었다. 국민연금의 주식운용은 직접운용과 위탁운용으로 구분되는데, 투자지침에 따르면 직접운용은 패시브(passive) 스타일이지만 위탁운용은 액티브(active) 스타일로 운용하게 되어있다. 이와 같은 현상에 주목하여 본 논문은 한국주식시장에서 경기상황(경기수축기 vs 경기확장기) 및 운용스타일(직접운용 vs 위탁운용)에 따라 펀드성과가 다르게 나타나는 지를 실증분석하였다. 국민연금의 주식운용성과를 분석하는데 2002년 1월부터 2013년 12월까지의 월간자료를 이용 하였고, 실증모형으로 Jensen모형과 Fama-French모형 및 Carhart모형을 기반으로 하되 경기 국면에 적절하게 대처하는 Kosowski(2011)의 국면전환(regime-switching)버전을 이용하였다. 실증결과를 요약하면 다음과 같다. 펀드성과는 경기상황별로 다르게 나타났고, 경기확장기 보다 경기수축기에 펀드성과가 우수하게 나타났는데 이는 외국의 실증연구와 동일한 결과이다. 시장요인은 펀드성과에 운용스타일과 모형(Jensen, Fama-French, Carhart)을 막론하고 경기 수축기뿐만 아니라 경기확장기에 양(+)의 영향을 미쳤지만, 기업가치 요인과 기업규모 요인 및 모멘텀 요인은 운용스타일과 경기국면에 따라 펀드성과에 상이하게 영향을 미친 것을 발견 하였다. 본 논문의 한계점이자 향후 연구의 시사점으로 공개(disclosure)를 꺼려하는 국민연금 운용성과 자료를 사용한 결과 최근 시점을 포함하지 못하였고, 시계열적 기간이 외국보다 짧은 점을 들 수 있다.

Perspektif Asset Pricing Model dan Pengembangannya Pada Pasar Modal Indonesia

Every investor will pay attention to return and risk in investing in portfolios. In portfolio investment, this is known as the principle of high return high risk. To see this return and risk, 4 (four) models are known, namely 1) Capital Asset Pricing Model (CAPM) with beta factors (market risk), 2) French Fama models with beta, size and value factors, 3) Carhart model with factors beta, size, value and momentum, 4) the Arbitrage Pricing Theory (APT) model in this study, in addition to factors such as the model above, macro economic factors include economic growth, inflation, interest rates, the rupiah exchange rate against US dollars and the money supply. Models 1, 2 and 3 analyze from the fundamental side of the company while models 4 analyze from the macroeconomic side. Based on the theory of Ying (1966), Tauchen & Pitts (1983), Blume (1994), Lee & Swaminathan (2000), Gervais (2001) and Kaniel (2003) that the total trading volume affects the movement of stock indexes, stock prices and affects the magnitude of the level return and investment risk, then in this study the researchers added the total volume of activity factor as an effort to overcome the weaknesses found in the Carhart model where in calculations using the three sequential sort method, this model has not been able to record a holding period (the length of shares in the hands of investors) which in this study. The model with the addition of the total volume activity variable as a five factor pricing model is a model of the researcher's development. From the test results it can be concluded that the development model turned out to be better precision in estimating return and risk and its accuracy is more accurate than existing models.