Market Excess Returns Research Articles

Asset pricing models for Vietnamese non-life insurance companies

This paper aims to perform an extensive asset pricing analysis for the Vietnamese non-life insurance industry between 2008 and 2023. We document that well-known asset pricing models, such as the three-factor and five-factor models developed by Fama and French (1993, 2015), are unable to explain adequately the returns of non-life insurance stocks. Therefore, based on the results of Ammar et al. (2018) and He et al. (2021), we built a five-factor asset pricing model adapted to the Vietnamese non-life insurance industry. Empirical evidence shows that this model is better than other models in explaining the cross-section of non-life insurance stock returns. Significant factors are the excess market return, the size factor, the price-to-earnings ratio, the return on equity, and the reimbursement rate.

War discourse and global equity returns

This study investigates the asset pricing implications of war risks in global stock markets. We employ a novel war discourse index developed by Hirshleifer et al. (2023a), which captures market attention to war through news. Extending this approach to both developed and emerging markets, we uncover a significantly positive relation between war risks and global stock market excess returns, which is robust to a range of sensitivity checks. Our findings indicate that investor attention to war risks significantly influences equity premium in global markets.

Predicting consumption-wealth ratio changes and stock market returns

We show that the ability of Lettau and Ludvigson’s cay ratio to predict stock market returns could be greatly improved when adjustment is made for variations in expected cay ratio changes. We use the present-value identity of Campbell and Mankiw (1989) to derive the appropriate form of the adjustment and model the adjustment using a handful of macroeconomic variables. We find that the expected cay ratio changes vary in a predictable manner. Using our model to adjust cay improves the annual R̄2 values from 4.42% to 9.55% for in-sample prediction of excess market returns, and the out-of-sample pseudo R2 values increase from -1.88% and -1.72% to 2.38% and 3.69% with the first estimations using information up to 1985 and 1990, respectively. The superior performance also exists in medium-term market return predictions.

Testing Illiquidity and Momentum Factors with Asset Pricing: Evidence from Emerging Capital Markets of South Asia

This paper explores the asset pricing factors which pose aggregate risk to the portfolio returns in the Pakistan Stock Exchange (PSX). The purpose is to test the illiquidity and momentum factors along with the well-documented three factors in asset pricing model using Fama and French (2015) and Lam and Tam (2011) for one of the emerging markets of South Asia, i.e., Pakistan, using 20-year monthly data from January 2001 to December 2020. This paper adopts the methodology of Fama and French (2015) as used in the developed market and Lam and Tam (2011) for the emerging market phenomenon, to formulate the portfolio returns based on Size, Book-to-Market(BM), and the Liquidity, and test these returns against the factors causing the return variations. The results based on the 3-factor model, liquidity-adjusted model, and the momentum-based model validate factors of excess market return (CAPM), size, value, liquidity, and momentum as significant risk factors in explaining the variations in portfolio returns of PSX stocks. The portfolio access returns for PSX stocks are adjusted for risk factors with mixed significant response holding average explanatory power. Our results are robust to the GRS F-test.

Fama and French Three Factor Model

This study seeks to investigate the application of FF3FM in the Nigerian stock market. The study examined the behaviour of stock returns in relation to market beta, firm size (market equity), and book-to-market equity (BE/ME) factors. Sixty- eight (68) sample size was selected from all stocks quoted on the Nigerian Stock Exchange (NSE) from 2013 to 2022. Time series regression analysis was adopted. Monthly excess portfolio returns were regressed on firm size, excess market returns and book-to-market-equity ratio. The findings showed a strong correlation between book-to-market equity variables, firm size, and excess stock market returns and predicted portfolio returns. This suggests that the variation in stock returns in the Nigerian stock market can be explained by the FF3FM.

The Fama-French Three Factor Model Test on Excess Stock Return: Evidence From Hong Kong, Indonesia and Singapore Capital Market

The presence of the capital market has a very important role in the world economy because the capital market carries out economic and financial functions. One of the instruments in the capital market is stock. In stock investment, investors expect a return with a size that is in accordance with the level of risk they can afford. This study wants to test whether the Fama-French Three Factor Model variables, namely market excess returns, book-to-market equity and firm size, can be used to explain excess returns on the stock markets of Hong Kong and Indonesia with the observation period of 2018–2022. Based on the test results multiple linear regression, Gibbons, Ross, and Shanken test (GRS test) and spanning test, this study found that the variables in the Fama-French Three Factor Model can simultaneously be used to explain the excess return on all stock portfolios on the stock market in Hong Kong and Indonesia, and can only be used to explain the excess return on Big and S-H portfolios in Singapore. Based on the results of the GRS-test, in the Hong Kong market the most efficient portfolio is S-M, in the Indonesian market the most efficient portfolio is the Big portfolio, while in the Singapore market all portfolios are efficient and based on the spanning test, in the Hong Kong market the potential redundant factor is SMB, in in the Indonesian market, the potential redundant factor is HML, while in the Singapore market, there is no redundant potential factor.

The sensitivity of risk premiums to the elasticity of intertemporal substitution

AbstractThis paper incorporates reference‐dependent preferences into a consumption‐based asset pricing model featuring Epstein–Zin utility. Three relevant results emerge from this extension. First, agents prefer the late resolution of uncertainty in recursive utility. Second, the late resolution of uncertainty helps replicate the downward‐sloping term structure of market excess return. Third, the intertemporal substitution elasticity is more sensitive to asset prices through increasing precautionary saving motivations. A closed‐form solution for the proposed model largely explains (i) high, volatile, and countercyclical equity premiums; (ii) low risk‐free rates; and (iii) the downward‐sloping term structure of equity premiums and variance ratios.

Portfolio optimization and valuation capability of multi-factor models: an observational evidence from Dhaka stock exchange

The main goal of this study is to examine the return explanation strengths of the Carhart four-factor, the Fama–French three-factor, and the single-factor models in the context of the Bangladeshi stock market. We, therefore, reveal the risk-adjusted returns, test the valuation capability of multi-factor models, and estimate optimal portfolio weights of stocks listed in DSE under the DSE30 index. Our findings demonstrate that large capitalization firms that have low or medium book-to-market (B/M) ratios produce more concentrated returns than their counterparts, resulting in greater earnings per unit of total, systematic, and downside risks. Furthermore, we discover that each factorial value has an impressive capacity to explain the market excess returns; however, the influence of factor values on the cross-section of stock returns is somewhat contradictory. In particular, the momentum factor is unable to describe the cross-section excess returns, whereas the risk premium, size, and value factors have a significant impact on the cross-section excess returns. Finally, we find that a large-cap firm with a low B/M ratio is suitable for risk-seeking investors; in contrast, a small-cap firm with a low B/M ratio is appropriate for lower risk tolerance investors. Moreover, our empirical outcomes have noteworthy implications for private companies, investors, and policymakers.

Discovering Intraday Tail Dependence Patterns via a Full-Range Tail Dependence Copula

In this research, we employ a full-range tail dependence copula to capture the intraday dynamic tail dependence patterns of 30 s log returns among stocks in the US market in the year of 2020, when the market experienced a significant sell-off and a rally thereafter. We also introduce a model-based unified tail dependence measure to directly model and compare various tail dependence patterns. Using regression analysis of the upper and lower tail dependence simultaneously, we have identified some interesting intraday tail dependence patterns, such as interactions between the upper and lower tail dependence over time among growth and value stocks and in different market regimes. Our results indicate that tail dependence tends to peak towards the end of the regular trading hours, and, counter-intuitively, upper tail dependence tends to be stronger than lower tail dependence for short-term returns during a market sell-off. Furthermore, we investigate how the Fama–French five factors affect the intraday tail dependence patterns and provide plausible explanations for the occurrence of these phenomena. Among these five factors, the market excess return plays the most important role, and our study suggests that when there is a moderate positive excess return, both the upper and lower tails tend to reach their lowest dependence levels.

Public attention, sentiment and the default of Silicon Valley Bank

We assess the interplay between public attention and trading of the Silicon Valley Bank (SVB) stock before its default on March 10, 2023. Based on intra-day data in 15-min intervals, we estimate SVB market excess returns and match these with intra-day measures of investor attention based on the relative number of tweets and Google searches. Wavelet analysis reveals bilateral lead–lag patterns between both series and demonstrates that a higher level of attention led to a significant decrease in SVB returns. Thereby, the results provide evidence that Twitter sentiment and media attention ultimately fueled and accelerated the crash dynamics of Silicon Valley Bank. Economically, Twitter provides information at lower costs and higher effectiveness than newspapers and allows direct communication without potential distortions from media bias or timing lags in reporting. Hence, individuals can coordinate and communicate their run beliefs at a much faster pace, emphasizing the importance for financial stability.

Return predictability with endogenous growth

The component of the volatility of total factor productivity (TFP) that is orthogonal to the dividend price ratio is shown to have long-run predictive ability for excess market returns. This finding implies that TFP volatility should also predict real cash flows and/or real interest rates: it is found to mainly predict real cash flows through inflation. A model with endogenous growth, Epstein-Zin preferences and price rigidities reconciles both TFP volatility-driven long-run predictability and its real implications. Within the model, we justify the similar (to that of TFP volatility) predictive ability of a low-frequency notion of market volatility as well as the cross-sectional pricing of TFP volatility risk in alternative asset classes.

Market‐wide overconfidence and stock returns

AbstractIn this paper, a novel measurement of overconfidence over the market is developed based on the size of ambiguity (the confidence of investors in information). The proposed measure of market‐wide overconfidence is consistent with the predictions motivated by prior literature. It has a significant negative association with the next‐month market excess return. Associations between the overconfidence measure and riskier portfolio returns behave stronger and last longer, implying a risk‐taking proclivity of overconfident investors.

Asset pricing with dividend surprises

In this paper, we derive an intertemporal dividend-surprise-augmented asset-pricing model and show that the expected risk premium compensates for stock returns’ exposure to (i) the market-wide dividend-surprise hedge portfolio based on dividend yield surprise and volatilities, in addition to (ii) the excess market return without dividend yield (as in the conventional CAPM) and (iii) the market-wide dividend yield factor without uncertainty. Our model implies that the uncertainty on dividend-surprise yield is attributable to systematic risk and should be priced at the cross-section, thereby theoretically supporting the existing empirical studies on the relation between dividend surprise and cross-sectional stock returns.

Predicting stock market returns using aggregate credit risk

We investigate how credit risk predicts stock returns in the time-series at the aggregate level in the Chinese market. We find that the aggregate credit risk, measured by the option-based structural model, is a strong positive predictor of future stock market excess returns at various horizons. The predictive power remains significant even after controlling for a number of widely-researched predictors or under out-of-sample tests. The positive relationship between aggregate credit risk and expected stock market returns accords with the risk-return tradeoff theory. We also find that the predictive power comes from the discount rate channel. A higher level of aggregate credit risk is related to a higher discount rate of future cash flows, and thus generates higher expected returns.

Performance Evaluation of Mutual Funds Using Risk Return Relationship Models - An Empirical Study

Purpose: The main purpose of this study is to analyse the performance of mutual funds using Risk- Return Relationship Models. Theoretical framework: One of India's most important financial intermediaries, mutual funds can provide a wide range of financial services to small and large investors. They are also involved in the country's transformation, and their market participation has become more important. Evaluating a mutual fund's performance concerns investors, researchers, and fund managers. It should be conducted in a way that helps investors make informed decisions and maximize returns. A regular evaluation of a fund's performance is also essential for investors. Design/methodology/approach: The performance of 12 growth-oriented mutual funds has been evaluated using three Risk Adjusted performance measures, namely the Treynor index, Sharpe index, and Jensen measure. Treynor Index, developed by Treynor and Mazuy (1966), defined the measure as the ratio of returns to systematic Risk (Beta). The higher the ratio better the performance. Sharpe Index, developed by Sharpe (1964) defined as the ratio of returns to the variability of returns. Jensen's measure (Jensen 1968) regresses excess fund return with the excess market return. Monthly data was used during the period from Jan 2015 to Dec 2019. Further monthly returns of 12 diversified Equity mutual funds were compared with the returns of the B.S.E.( Bombay Stock Exchange) national index during the same period. Findings: It is identified from the results that the mutual funds have not performed better than their benchmark indicators except the ICICI Multi-asset fund and HDFC mid-cap opportunity fund in terms of a non-risk adjusted measure of the average returns as well as in terms of Risk-adjusted performance measures. Research, Practical & Social implications: Fund houses, Fund managers, researchers, and mutual fund investors can benefit more from a strong risk management foundation. It can help them make informed decisions and maximize their returns. Originality/value: This study differs from past studies because it examined the risk-adjusted performance of a few mutual funds, which ultimately may use by investors and policymakers to enhance the returns in these funds.

Equity overvaluation, insider trading activity, and M&A premium: Evidence from China

Based on catering theory and M&A arbitrage theory, this paper focuses on the motivation and economic consequences of high premium M&A in China's capital market. The main research conclusions are as follows: First, the more equity overvaluation, the higher the merger premium and the short-term excess market return. Second, the more insider trading behaviour after equity overvaluation, the higher the merger premium and the short-term excess market return. Third, the greater the short-selling pressure after the equity overvaluation, the lower the merger premium and the weaker the short-term excess market return. Finally, this paper studies the economic consequences of M&A after equity overvaluation, and finds that M&A driven by equity overvaluation can only improve M&A performance in the current year, but cannot achieve long-term synergies. Based on the theory of M&A arbitrage, this paper studies the explanation mechanism of equity overvaluation to high-premium M&A in China's capital market, provides new evidence for executive's agency behaviour in M&A. This paper has important policy implications for the healthy development of M&A in the current emerging capital market.

영구적·일시적 현금흐름 뉴스와 할인율 뉴스에 따른 모멘텀 수익률 분석

In this paper, unexpected market excess returns are decomposed into permanent cash-flow news, temporary cash-flow news, and discount-rate news by using a log-linear SVAR model, and the profitability of momentum strategies is analyzed under these news states. The empirical results are as follow. Frist, Momentum returns exist in the US stock market. Second, momentum profitability exists under both permanent and temporary cash-flow news states. This supports the results of Celiker et al. (2016) that momentum profitability exists in the US stock market under cash flow news states. Third, the momentum effect is strong even under the discount-rate news. Finally, Momentum profitability is stronger when the overall market is in an up market. In other words, when the market is up, investors tend to be overconfident, which creates momentums. This paper can analyze which factors play an important role in determining momentum returns by estimating permanent and temporary cash-flow news and discount-rate news by using the developed news decomposition method.

A comprehensive investigation on the predictive power of economic policy uncertainty from non-U.S. countries for U.S. stock market returns

This study uses economic policy uncertainty (EPU) indices for ten developed countries, three diffusion models, and five combination methods to forecast excess returns in the U.S. stock market. It shows empirically that, over the period January 1997 to January 2022, non-U.S. EPU indices have better predictive power for U.S. equity market excess returns than the U.S. EPU index itself. This illustrates how economic information from international markets can affect the U.S. stock market. This finding challenges the extensively recognized view that the U.S. is where important market signals are initially transmitted to other markets, suggesting that this belief is incomplete. Our outcomes are robust to a battery of tests covering model selection, model specification, forecast horizons, and the pandemic period, and their economic values are assessed. The findings are essential for the financial field to confront future fierce situations and crises.

Capitalisation rates for commercial real estate investments: evidence from Australia

PurposeThe paper is motivated by the paucity of empirical research on the determinants of capitalisation rates/yield in the commercial property market. Compared to property price determinants, the capitalisation rate has received significantly less attention. This is somewhat surprising given that the capitalisation rate is a more insightful indicator for investors on commercial property market performance than merely price changes or trends. The capitalisation rate, measured as the ratio of net operating income to the property’s capital value, captures the asset’s overall ability to generate income which is crucial for investors who typically invest in property for their income-generating capacity. The purpose of this paper is to address these issues.Design/methodology/approachTo evaluate the determinants of capitalisation rates, time series analysis was used. The data capture performance in the Australian commercial property market between 2005 and 2018. All macroeconomic and financial data are freely available from official sources such as the Australian Bureau of Statistics and the nation’s central bank. Methodology wise, given the problematic nature of the data such as a mixed order of integration and the possibility of cointegration amongst some of the I (1) variables, the autoregressive distributed lag model was selected given its flexibility and relative lack of assumptions.FindingsBond rates, market risk premiums, stock market excess returns and other macroeconomic variables were found to drive capitalisation rates of Australian commercial properties. A 1% increase in the bond rate results in approximately 0.3–2.4% increase in capitalisation rates depending on the sub-market. Further, a 1% increase in excess market returns results in a 0.01–0.02% increase in capitalisation rates. Regarding risk premiums, a 100 basis point increase in the BBB spread results in approximately 0.92–1.27% reduction in cap rates in certain markets.Practical implicationsAsset managers will find these results useful in asset allocation strategies. Commercial properties offer attractive investment qualities such as yield stability in periods of economic uncertainty while allowing for the possibility of capital growth through appreciation of the underlying asset. By understanding the factors that affect the capitalisation rate, practitioners may predict emerging trends and identify threats to portfolio return and stability. This allows better integration of commercial property in the construction of portfolios that remain robust in a variety of market conditions.Originality/valueThe contribution to literature is significant given the lack of similar studies in the Australian market. The performance of real estate assets using cap rates as a comparative measure to equities and bonds influences decisions in asset allocation strategies. It provides crucial information for investors to estimate the performance of commercial property. This research supports the notion that both space and capital market indicators jointly affect capitalisation rates. The findings expand the knowledge base relating to commercial properties and validate the assessments of investors, developers and valuers who utilise yield as a performance benchmark for asset allocation strategies.

Unveiling the black swan of the Inflation-Adjusted Real Excess Returns-Risk Nexus: Evidence from Pakistan

The risk-free rates are widely used as benchmark to measure excess stocks returns or excess market returns and contribute a significant role in Asset Pricing Models. The purpose of this study is to scrutinize the risk and real excess portfolio returns using inflation adjusted risk-free rates, a unique measuring technique with a primary focus on the momentum augmented Fama-French five-factor model, utilising monthly data for 1994-2022 from the Pakistan Stock Exchange. Using OLS regression technique, the findings reveal that except profitability, the market, size, value, momentum and investment move largely correlated with excess portfolio stocks returns. The Gibbons, Ross & Shanken test confirms that the momentum augmented Fama-French five-factor model outperforms in the market.