Factor Premiums Research Articles

Investigation on Influence Factors of the C-REIT Market: Applying the Fama-French Three-Factor Model

This research paper has applied the Fama-French Three-Factor Model to the China Real Estate Investment Trust (C-REIT) market over a two-year period from June 2022 to June 2024. The innovation is recognized as the C-REIT market was established in 2021 with the first 9 REITs issued and few researches were conducted on the C-REITs. The study obtained data from the Wind database in the after-COVID period and concluded that the model fits well for the behavior of the Chinese REIT market. The market premium factor is found to be positive, while the size factor (SMB) is negatively significant, and the value premium (HML) is positively significant. This suggests that REITs with smaller market capitalization and those with a higher book-to-market ratio are more likely to contribute to the portfolio's excess returns. The intercept in the regression is statistically significant and that implies that there may be additional factors that are not captured by the current model. As such, the paper advocates for further research into multi-factor models to explore potential factors.

Factor timing in the Chinese stock market

AbstractI conduct an exploratory study about the feasibility of factor timing in the Chinese stock market, covering 24 representative and well‐identified risk factors in 10 categories from the literature. The long–short portfolio of short‐term reversal exhibits strong out‐of‐sample predictability, which is robust across various models and all types of predictors. This predictability is significant both statistically and economically, with a simple investment strategy obtaining its return three times higher than the buy‐and‐hold return in the sample period and a significant annualized 20.4% CH‐3 alpha. Portfolio historical volatility and market volatility measurement predictors play crucial roles in the reversal factor premium's robust predictability. However, such results are not evident in predicting all other factors' long–short portfolios as well as all factors' long‐wing and short‐wing portfolios, and this failure cannot be attributed to their exposure to unpredictable market returns.

Commodity premia and risk management

AbstractWe examine the role of risk management in the context of commodity factor premia. Stopping losses in individual commodities effectively improves the average returns of long‐short commodity premia through persistent reduction in the frequency and severity of drawdowns. The magnitude of improvement is related to the quality of the signal, commodity return volatility, and autocorrelations, as well as transaction costs. The efficacy of a stop‐loss strategy can be enhanced by dynamically calibrating loss thresholds in accordance with realized volatility, and it performs best in high conviction weighting schemes. Overall, we highlight the pivotal role of risk management beyond volatility targeting and risk‐parity in harnessing commodity risk premia.

Smart Rebalancing

The sometimes vast gap between live results and paper portfolio performance is caused in part by trading costs, discontinuous trading, and missed trades or other frictions, along with asset management fees. Smart beta and factor strategies are not exempt from this sort of “implementation shortfall.” This paper provides new evidence on the efficacy of prioritizing transactions so as to focus portfolio turnover on the trades that offer the strongest signals and hence the highest potential performance impact. Rebalancing filters of this sort can capture much of the factor premia for a long-only paper portfolio while cutting turnover and trading costs relative to a fully rebalanced portfolio.

Pengaruh Premi, Pengetahuan Dan Religiusitas Terhadap Keputusan Nasabah Berasuransi Di PT. Asuransi Jiwa Syariah Al-Amin Jambi

This study aims to see the effect of premiums, knowledge and religiosity on insurance customer decisions at PT. Al-Al-Amin Jambi Sharia Life Insurance. This study has independent variables (variables that influence) and dependent variables (variables that are influenced). This type of research is quantitative research. Data collection obtained is by means of a questionnaire (questionnaire). The sample in this study amounted to 61 people. The analysis used is multiple regression analysis. After partial testing, it was concluded that the premium variable had a significant effect on the insurance customer's decision. In addition to the premium factor, there is also a significant influence of knowledge variables on insurance customer decisions. Finally, the religiosity variable has a significant effect on insurance customer decisions. Based on the results of the F test (simultaneous) it can be concluded that the variable premium, knowledge and religiosity together have a significant influence on the decision of insurance customers at PT. Al-Amin Sharia Life Insurance.

Research on the Co-Creation Mechanism of Geographical Indication Industry Value Based on Evolutionary Game Analysis

The success of the geographical indication industry relies on the collaborative value creation among its stakeholders. This article presents an evolutionary game model for the triad of associations, firms, and peasant households in the geographical indication industry. The model examines their strategic choices and analyzes the impact of profitability, scale factors, and premium factors across different developmental stages. The study uncovers that while all parties may display collective behavior, there are variations specific to each stage. In periods of low profitability, firms tend to adopt a more cautious approach, while peasant households prioritize overall benefits. Both scale factors and premium factors guide the game towards positive strategies. Consequently, it is recommended to strengthen associations’ leadership role by fostering firm accountability in quality governance, reducing costs and risks associated with peasant household participation, safeguarding their rights and interests, enhancing economies of scale for geographical indication products, and bolstering competitiveness and sustainability.

Is the Korean green premium in equilibrium?

This study examines the Green premium in the Korean stock market using the two-factor equilibrium model developed by Pástor, Stambaugh, and Taylor (2021), which consists of the Market and Green factors. From 2012 to 2020, the Green factor premium in the Korean stock market is estimated to be negative, with a monthly average of −0.23%. This finding aligns with the expectations of the equilibrium model, which suggests a negative Green premium (indicating low Green and high Brown) due to the investors’ preference for green investments and the demand for hedging against climate risk. The negative sign of the Green factor premium holds robustly across different methods and data employed in the analyses. However, there has been a recent weakening in the magnitude of the negative Green factor premium. This suggests a potential impact of positive ESG shocks on the Korean stock market, similar to the case observed in the US stock market, where a positive realized Green premium was identified by Pástor, Stambaugh, and Taylor (2022).

EMPIRICAL TESTING OF FAMA-FRENCH ASSET PRICING MODEL IN INDONESIA STOCK EXCHANGE DURING COVID-19 PANDEMIC

The volatility of the Indonesian Stock Exchange (BEI) increased significantly during the Covid-19 pandemic period. In this period return predictability and price volatility in the stock index experienced a single structural break. There is concern among investors and academics that the asset pricing approach model that has been empirically accepted so far is unable to explain the return or excess return of an asset or investment during the Covid-19 pandemic period. This research tests the significance of the size (market capitalization), profitability, value (book-to-market), investment, and market risk premium (Rm-Rf) factors on the excess return of stock portfolios on the Indonesian Stock Exchange during the Covid-19 pandemic period. Existing studies show that the Covid-19 pandemic has affected investor sentiment, causing investors to panic and be pessimistic about their investments. In addition, there were deviations from the efficient market hypothesis during several pandemic periods in several countries so that stock prices did not fully reflect the available information. After testing, it was found that the factors size (market capitalization), profitability, value (book-to-market), investment, and market risk premium (Rm-Rf) did not have a significant influence on the excess return of stock portfolios on the Indonesia Stock Exchange during the period Covid-19 pandemic.

Digital maturity index for Russian public companies

Subject. The article addresses the digital premium in stock prices as a risk factor in multi-factor asset pricing models in the Swedish and Russian stock markets. Objectives. The purpose is to assess the level of digital premium as a risk factor in multi-factor pricing models, by using the corporate digital maturity index developed by L. Blixen-Fineke and his colleagues, and E.I. Gibadullin, based on data from Swedish and Russian issuers, respectively. Methods. The main research method is the analysis of financial and non-financial statements of 26 Swedish public companies and 51 domestic issuers from 11 sectors of the Russian economy. Results. The analysis revealed statistical significance of digital premium factor in the domestic stock market, as well as an incipient trend of excess of historical return of the investment portfolio of shares of companies with a high level of digital maturity over the portfolio of shares of companies with a low level of digital maturity. These results enable to modify current multi-factor asset pricing models to improve their explanatory power. Conclusions. The revealed empirical evidence of the existence of price anomaly in the form of digital premium creates the necessary evidence base for the development of research aimed at the evolution of multi-factor asset pricing models in the domestic stock market. The findings create a foundation for the development of factor-based investing on the Russian stock market, based on selection of company shares for the investment portfolio, considering the level of digital development of companies.

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.

The Estimation of Risk Premia with Omitted Variable Bias: Evidence from China

The Chinese stock market is replete with numerous omitted variables that can introduce biases in the standard estimation of risk premiums when traditional linear asset pricing models are applied. The three-pass method enables the estimation of risk premiums for observable factors even when not all relevant factors are explicitly specified or observed within the model. Accordingly, we have applied this method to construct portfolios with stocks from China’s A-share market as the test assets. Empirical research findings indicate that the three-pass method could be more effective than traditional linear asset pricing models in estimating risk premiums.

Factor momentum in the Chinese stock market

Based on 10 commonly used factors, we construct a novel factor momentum strategy in the Chinese stock market, which earns an annualized return of 9.91 %, with a Sharpe ratio of 1.15. Factor momentum subsumes stock momentum, high-priced momentum, and industry momentum, digests its component factors and a variety of anomalies, and represents the momentum anomaly in China. Furthermore, mispricing correction helps explain factor momentum, which produces stronger returns during higher aggregate idiosyncratic volatility periods as well as among stocks with higher information asymmetry and short-sale constraints. Exposure to factor premiums and the manifestation of predictability determine factor momentum in China.

The Validity and Reliability Performance Evaluation of the Fama-French Six Risk Premium Factors Model: Evidence from the Capital Stock Market of Pakistan

The study goal, aims, purpose and objective are to examine the Validity, Reliability and Performance Evaluation of the Fama-French Six Risk Premium Factor’s Model: Evidence from Capital Stock Market of Pakistan. The sample used were the balance sheet and Income statements annual reports of an eligible Non-Financial Companies issued from a State Bank of Pakistan (SBP). However, the idea for portfolio creation and a breakpoint have taken from keneath french data side. The sample data is 130 Non-Financial Companies covering the actual analysis from July 2014 to June, 2019. The (2x2) = 4 sort approaches for emerging markets and returns are used to construct portfolio and breakpoints for the SMB, HML, RMW, CMA, and WML other than Mkt-Rft. A total set of 16 set of portfolios are designed from dual categorization (Bivariate) designed for separately couple of size and one additional factor. A whole set of (4x4= 16), portfolios shaped as a dependent factor typically recognized as left-hand-side portfolios (LHS) and the same for independent risk premium factors for right hand side (RHS). The study found and concluded regarding the intercepts that all 16 set of four portfolios are insignificant and there are no pricing errors in the time of cost determination and predictions. The other objectives regarding slopes are found and concluded that the slopes of all risk premium i.e., MKT, SMB, HML, RMW, CMA, and WML and along with error correction term ECT (-1) are all positives and negatives and also statistically significant and explaining and predicting the average portfolio returns for 16 set of portfolios excess returns. The third main objectives regarding the other performance evaluation indicators, proposed to FF6F model’s relatively greater descriptive and explanatory power in each group of portfolios. Further, the value of R-squared is less than Durbin Watson value, means there is no sign of spurious linear regression too. Finally, it is found and concluded that the quality criteria suggests that the small values of Avg|α| or Avg|α-α ̅|in all equations are as the better model. It is further found and concluded that the Avg|α| of all six risk premium factors asset pricing models are the lowest values and acceptable range. It also further found and concluded that the fGRS and pGRS display the alpha is insignificant for 16 set of portfolios The research identifies that the asset pricing models are relatively more effective for diversified portfolios than concentrated portfolios and it is challenging to find a model that is effective in explaining the variation in the returns of any portfolio, but there is the possibility of finding a portfolio which works for a model and the investors can maximize their returns with a carefully chosen portfolio based on particular characteristics with a fewer number of stocks. Study proposes that corporate managers, policymakers, financial experts, and individual investors should have a stronger understanding of how to forecast stock prices on the Pakistan Stock Market, since it will help them when they are making investment decisions.

The macroeconomic announcement premium and information environment

The quality of information environment has impact on the market risk premium and the expected risk reduction on macroeconomic announcement days. The risk premium is high when the risk is high as in standard asset pricing models, while the risk premium is low when the prevailing information environment is poor. The same is true for the expected risk reduction. These effects extend to market factor premiums (i.e., the premium associated with market betas) on various sets of portfolios and have a connection with business cycles. The findings are consistent with the notion that poor information environment hampers the effectiveness of learning.

ESG Disclosure and Firm Performance: An Asset-Pricing Approach

Disclosing information on environmental, social, and governance (ESG) parameters is voluntary for most firms across the world. Companies disclose their performance on ESG datapoints due to two main reasons—(i) to gain the trust of stakeholders through increased transparency and (ii) to comply with regulations imposed by governments and investment houses. Using a dataset of companies disclosing ESG parameters during 2014–2021 from the S&P BSE 500 index, this study investigates the role of ESG disclosure on firm performance. We divide the constituent securities into three factors—size, value, and disclosure to study the premiums generated by firms on each factor using single-, double-, and triple-sorting approaches. We utilize time series regressions along with GRS tests to empirically test the presence of factor premiums. We find the significant role of factors size, value, disclosure, and a dummy variable for the COVID-19 pandemic period to explain the portfolio returns. The study found a negative ESG disclosure premium stating that firms with high levels of disclosure earn less returns compared with the firms with less disclosures. The findings of this study contrast with multiple studies in the past that have found a positive disclosure premium. Our findings help reconcile the mixed evidence on the disclosure–returns relationship.

The Smart Beta Mirage

Abstract We document and explain the sharp performance deterioration of smart beta indexes after the corresponding exchange-traded funds (ETFs) are launched for investment. While smart beta is purported to deliver excess returns through factor exposures, the market-adjusted return of smart beta indexes drops from about 3% “on paper” before ETF listings to about −0.50% to −1% after ETF listings. This performance decline cannot be explained by variation in factor premia, strategic timing, or diminishing returns to scale. Instead, we find strong evidence of data mining in the construction of smart beta indexes, which helps ETFs attract flows, as investors respond positively to backtests.

Exploring the merits of five-factor investing: A critical literature review

The dynamics of investing in stock markets have changed considerably over the past twenty years. The value and growth investing concept has drawn much attention and continues to dominate portfolio management. Factor investing is an approach that aims at quantifying particular characteristics through matrixes of quality, value, momentum, and growth to improve the returns of a portfolio. Although the three-factor style of investing has gained widespread acceptance, the five-factor continues to be a source of disagreement among academics and industry practitioners. This study aimed to review the merits of five-factor investing critically. A critical literature review was used to review prior literature. The narratives from the literature reveal that the five-factor investing style will result in multiple sources of expected return. Hence, using five factors in portfolio formation has merits and will significantly improve the returns and most likely outperform the market portfolio. Factor premiums have proven to be drivers of asset return. Therefore, market participants and investment managers can intentionally assume additional exposures to deliver superior risk-adjusted returns compared to the market with the five-factor investing style. According to the author's knowledge, this is the first study to objectively analyze the literature on five-factor investing and propose that active managers can earn positive alphas on a risk-adjusted basis through factor exposures.

Investing in Deflation, Inflation, and Stagflation Regimes

We examine asset class and factor premiums across inflationary regimes. As periods of deflation, high inflation, and especially stagflation are relatively uncommon in recent history, we use a deep sample starting in 1875. Moderate inflation scenarios provide the highest returns across asset class and factor premiums. During deflationary periods, nominal returns are low, but real returns are attractive. By contrast, real equity and bond returns are negative during a high inflation regime and especially so during times of stagflation. During these “bad times,” factor premiums are positive, which helps to offset part of the real capital losses.

The role of size effects in moderating the benefits of sustainable investing

Using an extensive sample of environmental, social, and governance (ESG) ratings, we reexamine the corporate social responsibility (CSR) factor premium in the developed equity markets between 2007 and 2019 and show that its extent is contingent upon size effects. Consistent with the novel market equilibrium, we contend that the exponential growth of socially responsible investment (SRI) has rendered the risk-adjusted returns of large CSR-leading firms in line with or even below their lagging counterparts. In line with the neglected effect, greater market segmentation, lower market efficiency, and lower investor awareness of CSR enable us to observe the former market equilibrium in the smaller corporation partition, where CSR-lagging firms exhibit lower returns than leading ones. We thus theorize a two-stage CSP–CFP relationship, where size effects are considered a relevant moderator. This contention is robust to portfolio and panel regression settings. However, our partly contradicting results with the existent literature emphasize the divergence in ESG ratings across rating agencies. JEL Classification M14; G11; G15

Does the investment-profitability correlation affect the factor premiums? Evidence from China

We investigate whether the investment-profitability correlation affects the investment and profitability premiums in the U.S. and Chinese markets. By replicating the results of Kilic, Yang and Zhang (2022), we confirm that the factor premiums are lower when the investment-profitability correlation is high in both markets. However, unlike the U.S. market, mitigating the correlation effect does not resurrect the insignificant investment premium in China. In contrast, the profitability factor earns robust returns under different specifications.