Application of asset pricing models: evidence from Saudi exchange
The Saudi Arabia Stock Exchange (Tadawul) is one of the biggest emerging Stock Exchanges in the Middle East region. Therefore, this research aims to apply Fama and French (2015) 5-factor model on Tadawul, and compares it with the Fama and French 3-factor model and CAPM to check the applicability of...
| Main Author: | |
|---|---|
| Format: | Article |
| Language: | English |
| Published: |
LLC "CPC "Business Perspectives"
2020-04-01
|
| Series: | Investment Management & Financial Innovations |
| Subjects: | |
| Online Access: | https://businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/13384/IMFI_2020_01_Salameh.pdf |
| _version_ | 1818751365091950592 |
|---|---|
| author | Hussein Mohammad Salameh |
| author_facet | Hussein Mohammad Salameh |
| author_sort | Hussein Mohammad Salameh |
| collection | DOAJ |
| description | The Saudi Arabia Stock Exchange (Tadawul) is one of the biggest emerging Stock Exchanges in the Middle East region. Therefore, this research aims to apply Fama and French (2015) 5-factor model on Tadawul, and compares it with the Fama and French 3-factor model and CAPM to check the applicability of the models in Tadawul and the identity of the factors that can affect stock returns. Furthermore, the Generalized Method of Moments (GMM) regression has been implemented to examine the impact between the variables in the models. Empirically, the results show that Fama and French (2015) 5-factor model is the most consistent model in comparison to the other two models in terms of explaining the cross-section of average stock returns in Tadawul. However, it is not the best according to the intercepts results of all the regressions in 2x3, 2x2, or 2x2x2x2 sorts. Besides, Fama and French (2015) 5-factor model has the highest explanatory power in most of the portfolios based on the adjusted R2 regardless of the sort (2x3, 2x2, or 2x2x2x2). Finally, the results conclude that Fama and French (2015) 5-factor model can be an applicable model in Tadawul but only market and size can affect the stock returns, while the value, profitability, and investment cannot. Accordingly, the author recommends that, as a continuation of this research, further research can be done, which investigates a model with additional factors like momentum and illiquidity. |
| first_indexed | 2024-12-18T04:34:24Z |
| format | Article |
| id | doaj.art-a10fbfad9b124e649adb99bf1cb0307e |
| institution | Directory Open Access Journal |
| issn | 1810-4967 1812-9358 |
| language | English |
| last_indexed | 2024-12-18T04:34:24Z |
| publishDate | 2020-04-01 |
| publisher | LLC "CPC "Business Perspectives" |
| record_format | Article |
| series | Investment Management & Financial Innovations |
| spelling | doaj.art-a10fbfad9b124e649adb99bf1cb0307e2022-12-21T21:20:54ZengLLC "CPC "Business Perspectives"Investment Management & Financial Innovations1810-49671812-93582020-04-0117134836810.21511/imfi.17(1).2020.2913384Application of asset pricing models: evidence from Saudi exchangeHussein Mohammad Salameh0Associate Professor in Finance, Researcher, AmmanThe Saudi Arabia Stock Exchange (Tadawul) is one of the biggest emerging Stock Exchanges in the Middle East region. Therefore, this research aims to apply Fama and French (2015) 5-factor model on Tadawul, and compares it with the Fama and French 3-factor model and CAPM to check the applicability of the models in Tadawul and the identity of the factors that can affect stock returns. Furthermore, the Generalized Method of Moments (GMM) regression has been implemented to examine the impact between the variables in the models. Empirically, the results show that Fama and French (2015) 5-factor model is the most consistent model in comparison to the other two models in terms of explaining the cross-section of average stock returns in Tadawul. However, it is not the best according to the intercepts results of all the regressions in 2x3, 2x2, or 2x2x2x2 sorts. Besides, Fama and French (2015) 5-factor model has the highest explanatory power in most of the portfolios based on the adjusted R2 regardless of the sort (2x3, 2x2, or 2x2x2x2). Finally, the results conclude that Fama and French (2015) 5-factor model can be an applicable model in Tadawul but only market and size can affect the stock returns, while the value, profitability, and investment cannot. Accordingly, the author recommends that, as a continuation of this research, further research can be done, which investigates a model with additional factors like momentum and illiquidity.https://businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/13384/IMFI_2020_01_Salameh.pdfCAPMFama and FrenchGMMreturnsTadawul |
| spellingShingle | Hussein Mohammad Salameh Application of asset pricing models: evidence from Saudi exchange Investment Management & Financial Innovations CAPM Fama and French GMM returns Tadawul |
| title | Application of asset pricing models: evidence from Saudi exchange |
| title_full | Application of asset pricing models: evidence from Saudi exchange |
| title_fullStr | Application of asset pricing models: evidence from Saudi exchange |
| title_full_unstemmed | Application of asset pricing models: evidence from Saudi exchange |
| title_short | Application of asset pricing models: evidence from Saudi exchange |
| title_sort | application of asset pricing models evidence from saudi exchange |
| topic | CAPM Fama and French GMM returns Tadawul |
| url | https://businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/13384/IMFI_2020_01_Salameh.pdf |
| work_keys_str_mv | AT husseinmohammadsalameh applicationofassetpricingmodelsevidencefromsaudiexchange |