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A comparison of the efficacy of liquidity, momentum, size and book-to-market value factors in equity pricing on a heterogeneous sample: evidence from Asia

A comparison of the efficacy of liquidity, momentum, size and book-to-market value factors in equity pricing on a heterogeneous sample: evidence from Asia
A comparison of the efficacy of liquidity, momentum, size and book-to-market value factors in equity pricing on a heterogeneous sample: evidence from Asia

This paper compares the size and book-to-market value factors of Fama and French (1993) alongside Momentum of Jagadeesh and Titman (1993) with two Liu (2006) liquidity factors formed from 1 year rebalancing and 1 month rebalancing respectively. A heterogeneous and comprehensive sample of the top blue chip stocks of all national Asian equity markets with further differentiation undertaken between sub samples formed for Japan only and Asia excluding Japan for period January 2000 to August 2014. Our empirical results suggest that multifactor time invariant pricing models based on augmented capital asset pricing model (CAPM) framework are ineffective in explaining the cross section of stock returns in the presence of significant inter and intra-market segmentation. However an alternative model specification based on a time varying parameter specification and using same sets of factors yields significant enhancements in explaining cross section of stock returns across universe. We find that momentum factor largely lacks significance while a time varying two factor model, based on CAPM plus liquidity factor, is optimal. The liquidity factor being that of Liu (2006) and annually rebalanced. Our findings are important for investment managers seeking appropriate factors and modelling techniques to hedge against risks as well as firm's financial managers seeking to reduce costs of equity capital.

Asia, CAPM, Emerging Financial Markets, G11, G12, G15, Liquidity, O55
0963-8008
253-330
Hearn, Bruce
45dccea3-9631-4e5e-914c-385896674dc2
Hearn, Bruce
45dccea3-9631-4e5e-914c-385896674dc2

Hearn, Bruce (2016) A comparison of the efficacy of liquidity, momentum, size and book-to-market value factors in equity pricing on a heterogeneous sample: evidence from Asia. Financial Markets, Institutions and Instruments, 25 (4), 253-330. (doi:10.1111/fmii.12078).

Record type: Article

Abstract

This paper compares the size and book-to-market value factors of Fama and French (1993) alongside Momentum of Jagadeesh and Titman (1993) with two Liu (2006) liquidity factors formed from 1 year rebalancing and 1 month rebalancing respectively. A heterogeneous and comprehensive sample of the top blue chip stocks of all national Asian equity markets with further differentiation undertaken between sub samples formed for Japan only and Asia excluding Japan for period January 2000 to August 2014. Our empirical results suggest that multifactor time invariant pricing models based on augmented capital asset pricing model (CAPM) framework are ineffective in explaining the cross section of stock returns in the presence of significant inter and intra-market segmentation. However an alternative model specification based on a time varying parameter specification and using same sets of factors yields significant enhancements in explaining cross section of stock returns across universe. We find that momentum factor largely lacks significance while a time varying two factor model, based on CAPM plus liquidity factor, is optimal. The liquidity factor being that of Liu (2006) and annually rebalanced. Our findings are important for investment managers seeking appropriate factors and modelling techniques to hedge against risks as well as firm's financial managers seeking to reduce costs of equity capital.

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ASIA Liq-CAPM USD BH - Accepted Manuscript
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More information

Accepted/In Press date: 1 October 2016
e-pub ahead of print date: 12 October 2016
Published date: 1 November 2016
Keywords: Asia, CAPM, Emerging Financial Markets, G11, G12, G15, Liquidity, O55

Identifiers

Local EPrints ID: 423181
URI: https://eprints.soton.ac.uk/id/eprint/423181
ISSN: 0963-8008
PURE UUID: b1fd5c50-f1a8-415a-bdc7-480b18ae355e
ORCID for Bruce Hearn: ORCID iD orcid.org/0000-0001-9767-0198

Catalogue record

Date deposited: 19 Sep 2018 16:30
Last modified: 10 Sep 2019 00:22

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