Testing mispricing-augmented factor models in an emerging market: A quest for parsimony
This study is the first to test a financing-based misvaluation factor (UMO, undervalued-minus-overvalued), first proposed by Hirshleifer and Jiang (2010), for the Pakistani stock market. I find that the UMO factor, long underpriced (repurchase) stocks and short overpriced (new issue) stocks, earns s...
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| Format: | Article |
| Language: | English |
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Elsevier
2022-03-01
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| Series: | Borsa Istanbul Review |
| Subjects: | |
| Online Access: | http://www.sciencedirect.com/science/article/pii/S2214845021000466 |
| _version_ | 1811236671885148160 |
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| author | Fahad Ali |
| author_facet | Fahad Ali |
| author_sort | Fahad Ali |
| collection | DOAJ |
| description | This study is the first to test a financing-based misvaluation factor (UMO, undervalued-minus-overvalued), first proposed by Hirshleifer and Jiang (2010), for the Pakistani stock market. I find that the UMO factor, long underpriced (repurchase) stocks and short overpriced (new issue) stocks, earns significant mean and risk-adjusted returns. Further, I jointly examine the performance of UMO-augmented factor models – the Capital Asset Pricing Model, Carhart's four-factor model, and Fama and French's three-, five- and six-factor models – to find out which of these models or their subsets is most pertinent in the Pakistani stock market. A battery of tests – factor spanning regressions, Barillas and Shanken's (2017) maximum squared Sharpe ratio tests, and examination of two-way and one-way sorted portfolios using Gibbons-Ross-Shanken and Fama and French (2015, 2018) performance metrics over the 2003–2018 period – reveals that the UMO factor carries distinctive information that cannot be described by other factors under study. Finally, this study proposes a parsimonious four-factor model that combines the market, UMO, size, and profitability factors and outperforms the other models in Pakistan. |
| first_indexed | 2024-04-12T12:12:02Z |
| format | Article |
| id | doaj.art-14aa51bd0cbe4c38a806e9d622430360 |
| institution | Directory Open Access Journal |
| issn | 2214-8450 |
| language | English |
| last_indexed | 2024-04-12T12:12:02Z |
| publishDate | 2022-03-01 |
| publisher | Elsevier |
| record_format | Article |
| series | Borsa Istanbul Review |
| spelling | doaj.art-14aa51bd0cbe4c38a806e9d6224303602022-12-22T03:33:32ZengElsevierBorsa Istanbul Review2214-84502022-03-01222272284Testing mispricing-augmented factor models in an emerging market: A quest for parsimonyFahad Ali0School of Finance, Zhejiang University of Finance and Economics, Hangzhou, 310018, China; College of Economics, Zhejiang University, Hangzhou, 310058, China; School of Finance, Zhejiang University of Finance and Economics, Hangzhou, 310018, China.This study is the first to test a financing-based misvaluation factor (UMO, undervalued-minus-overvalued), first proposed by Hirshleifer and Jiang (2010), for the Pakistani stock market. I find that the UMO factor, long underpriced (repurchase) stocks and short overpriced (new issue) stocks, earns significant mean and risk-adjusted returns. Further, I jointly examine the performance of UMO-augmented factor models – the Capital Asset Pricing Model, Carhart's four-factor model, and Fama and French's three-, five- and six-factor models – to find out which of these models or their subsets is most pertinent in the Pakistani stock market. A battery of tests – factor spanning regressions, Barillas and Shanken's (2017) maximum squared Sharpe ratio tests, and examination of two-way and one-way sorted portfolios using Gibbons-Ross-Shanken and Fama and French (2015, 2018) performance metrics over the 2003–2018 period – reveals that the UMO factor carries distinctive information that cannot be described by other factors under study. Finally, this study proposes a parsimonious four-factor model that combines the market, UMO, size, and profitability factors and outperforms the other models in Pakistan.http://www.sciencedirect.com/science/article/pii/S2214845021000466G12G14 |
| spellingShingle | Fahad Ali Testing mispricing-augmented factor models in an emerging market: A quest for parsimony Borsa Istanbul Review G12 G14 |
| title | Testing mispricing-augmented factor models in an emerging market: A quest for parsimony |
| title_full | Testing mispricing-augmented factor models in an emerging market: A quest for parsimony |
| title_fullStr | Testing mispricing-augmented factor models in an emerging market: A quest for parsimony |
| title_full_unstemmed | Testing mispricing-augmented factor models in an emerging market: A quest for parsimony |
| title_short | Testing mispricing-augmented factor models in an emerging market: A quest for parsimony |
| title_sort | testing mispricing augmented factor models in an emerging market a quest for parsimony |
| topic | G12 G14 |
| url | http://www.sciencedirect.com/science/article/pii/S2214845021000466 |
| work_keys_str_mv | AT fahadali testingmispricingaugmentedfactormodelsinanemergingmarketaquestforparsimony |