Market Leverage Effect in Fama Frech Model

Document Type : Original Article

Authors

1 Associate Prof., Department of Public Administration, University of Tehran, Tehran, Iran.

2 Professor, Department of Financial Management and Insurance, University of Tehran, Tehran, Iran.

3 Ph.D Student in Financial Management, Alborz Campus, University of Tehran, Alborz, Iran.

Abstract

the model is investigated. Among the companies listed on the Tehran Stock Exchange, the number of statistical samples in the years under review (2016-2017) includes 1408 companies / year. According to the purpose of this research and the performed test, the result of the present research shows; In the three-factor model test, the effect of market factor and size is significant and the effect of value factor is not significant. Also, in the findings of the test of the three-factor adjustment model and considering the market leverage, the results indicate that the effect of market factors, value, size is significant. In both tests, the effect of market factor is significant and direct and the effect of size factor is significant and inverse. Also, the research results show that the value of the adjusted coefficient of determination in the modified three-factor model is more than the initial model and the addition of market leverage will improve the explanatory power of the model.

Keywords

References

1.Abbasi, A., and Ghezelje, G., (2012), the survey F.F.’s three factors model effect in distribution retuns, journal of accounting knowledge, 22: 212-221. (In Persian)
2.Aharoni, Gil, Bruce Grundy and Qi Zeng, (2013), Stock returns and the Miller Modigliani valuation formula: revisiting the Fama French analysis, Journal of Financial Economics, Volume 110, Issue 2, November 2013, Pages 347-357.
3.AhmadPour, A. and Rahmani, M., (2007), Size and book to market value effects in Stock return (TSE), Journal of financial research, 79: 37-19. (In Persian)
4.Amirshahi, M., Shirazi, M. and Siahtabari, M., (2007), the survey factors effect in invesmentors decide in TSE, Iranian journal of management sciences, 8: 159-179. (In Persian)
5.Andre, L.L., Marcelo, C.K., Antonio, C.F.P., Aldo, F.S., (2018), Size, value, profitability, and investment: Evidence from emerging markets, Emerging Markets Review, In Press.
6.Artmann, S., Finter, P., & Kempf, A. (2012). Determinants of expected stock returns: Large sample evidence from the German market, Journal of Business Finance & Accounting, 39(5‐6), 758-784.
7.Babaloeian, Sh., and Mozafari, M., (2016), Comparing F.F.’s five factors model, Carhart model and HXZ’s model, Quarterly of analysis in securities, 31: 17-32. (In Persian).
8.Banz, R.W., (1981). The relationship between return and market value of common stocks, Journal of Financial Economics, 9,103–126.
9.Bao, D., (2008), Time-Varying Market Leverage and the Market Risk Premium in New Zealand, A thesis submitted to the Victoria University of Wellington in fulfillment of the requirements for the degree of Master of Commerce and Administration in Money and Finance Victoria University of Wellington.
10.Basu, S. (1977). Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis, Journal of Finance, 12: 129-156.
11.Behandari, L. C, (1988), Debt/Equity ratio and expected common stock, return: Empirical Evidence, journal of finance, 43, 407-427.
12.Carhart, M., (1997), On Persistence of Mutual Fund Performance, Journal of Finance, 52 (1), 57-82.
 13.Chen, Long, Novy-Marx, & Zhang, Lu. (2010). An Alternative Three-Factor Model., available at; http:// papers.ssrn.com /sol3/papers .cfm ?abstract _id = 1418117.
Chiah, Mardy. Chai, Daniel. Zhong, Angel & Li, Song (2016), a Better Model? An Empirical Investigation of the Fama–French Five-factor Model in Australia, International Review of Finance, Vol 16, pp 595-638.
15.Cooper, M.J., H. Gulen and M.J. Schill, (2008). Asset Grow and the Cross-Section of Stock Returns, the Journal of Finance. 4, pp. 1609-1651.
Dhaoui A. & Bensalah, N., (2017), Asset valuation impact of investor sentiment: A revised Fama–French five-factor model, Journal of Asset Management, Palgrave Macmillan, vol. 18(1), pages 16-28, January.
 17.Dhaoui, Abderrazak & Bensalah, Nesrine, (2017), Asset valuation impact of investor sentiment: A revised Fama–French five-factor model, Journal of Asset Management, Vol 18 (1), pp 16-28.
 18.Eshraghnia Jahromi, h., and Nesvadian, K., (2008), Fama and French’s three factors model in TSE, journal of Sharif, 45: 39-46. (In Persian)
 19.Eslami Bidgoli, G. And Honardost, (2012), Fama and French’s three factors model and illiquidity risk in TSE, Investment knowledge, 2: 97-116. (In Persian)
20.Ezadinia, N., Ebrahimi, M., and Hajian nejad, A., (2014)., Comparing Fama and French’s three factors model and Carhart model in TSE, Quarterly of asset management and finance, 3: 17-28. (In Persian)
21.Fama, E. and French, K., (1993). Common risk factor in the returns on stocks and bonds, Journal of Finance, 33, 3-56.
22.Fama, E. F., & French, K. R. (2012). Size, Value, and Momentum in International Stock Returns. Journal of Financial Economics, 105(3), pp. 457-472.
23.Fama, E., French, k. (2015), A Five-factor Asset Pricing Model, Journal of Financial Economic, 116, 1-22.
24.Fama, E., French, K., (2017), International tests of a five-factor asset pricing model, Journal of Financial Economics, Vol 123(3), pp441–463.
25.Fan, S., & Yu, L. (2013). Does the Alternative Three-Factor Model Explain Momentum Anomaly Better in G12 countries?. Journal of Finance & Accountancy, 12.
26.Hakki, O. & Yilmaz, A. A., (2015), Leverage and Stock Returns: Evidence from Istanbul Stock Exchange, Accounting and Finance Research, Vol. 4, No. 4; 2015, 140-146.
27.Haugen, R, A., & Baker, N, L. (1996). Commonality in the Determinants of Expected Stock Returns, Journal of Financial Economics, 41, 401–439.
28.Hezbi, H., and Salehi, A., (2016), Comparing F.F.’s five factors model and Carhart model, journal of financial engineering and securities management, 28: 137-152. (In Persian)
29.Hou, H., Xue, C. and Zhang, L. (2014), A Comparison of New Factor Models, National Bureau of Economic Research.
30.Hubinette, N., and Jonsson, G. (2011). An Alternative Four-Factor Model, Master Thesis in Finance, Stockholm School of Economics
31.Ibbotson, R. G. and R. A. Sinquefield, (1976), Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns (1926–1974), Journal of Business, 49(1), 11–47.
32.Im, K., Pesaran, M. & Shin, Y. (2003), testing for unit roots in heterogeneous panels, Journal of Econometrics, 115(1), 53-74.
33.Kubota, K. & Takehara H., (2017), Does the Fama and French Five‐Factor Model Work Well in Japan?, International Review of Finance, 137-146.
34.Lally, M., (2002), Time Varying Market Leverage, the Market Risk Premium and the Cost of Capital, Journal of Business Finance and accounting, 29, 9-10, 1301–1318.
35.Lally, M., (2004), Estimating the Market Risk Premium in New Zealand through the Siegel Methodology, Accounting Research Journal, 17, 93-101.
3.Lally, M., (2004), the Fama-French Model, Leverage, and the Modigliani-Miller Propositions, the Journal of Financial Research, 3, 341–349.
37.Levin, A., Lin, C.F., and Chu, C., (2002), Unite root test in panel data: Asymptotic and finite-sample properties, Journal of economics, 108, 1-24.
38.Lintner, J. (1965). The valuation of risky assets and the selection of risky investments in stock portfolios and capital budgets. Review of Economics and Statistics, 47, 13–37.
39.Markowitz, H. (1952). A Property of Bessel Functions and its Application to the Theory of Two Rheometers, Journal of Applied Physics, 23(10), 1070-1077.
40.Maxim, Caudia A. (2015), the evaluation of CAPM, Fama-French and APT models on the Romanian capital market, Applied Financial Research (DASI).
41.Mojtahedzade, V., and Taremi, M., (2006), the survey F.F.’s three factors in TSE, journal of management, 18: 109-132. (In Persian)
42.Nikomaram, H., Rahmani, F., and Zanjirdar, M., (2008), the related Risk and expected rate of return, Journal of financial study, 3: 47-73. (In Persian)
43.Novy-Marx, R. (2012). The other side of value: The gross profitability premium, University of forthcoming in the Journal of Financial Economics.
44.Nusret C. (2015), the Five-factor Fama French Model: International Evidence, AvailableatSSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract _id=2601662.
45.Phillips, P. C. B., Perron, P. (1999), Testing for a Unit Root in Time Series Regression, Oxford Bulletin of Economics and Statistics, 61(4), 631–52.
46.Racicot, F. & Theoret, R. (2016). The q-factor Model and the Redundancy of the Value Factor: An Application to Hedge Fund. Journal of Asset Management, 17(7), 526-539.
47.Racicot, F., & Rentz, W.F., (2017), A panel data robust instrumental variable approach: a test of the new Fama-French five-factor model, Applied Economics Letters, 24, 6, 410-416.
48.Robatmeili, M., (2007), comparing CAPM and F.F’s three factors model in TSE, Thesis: Alzahra University. (In Persian)
49.Rosenberg, B., Kenneth, R. and Lanstein, R. (1985), Persuasive evidence of market inefficiency, Journal of Portfolio Management, 11, 9-17.
50.Ross, A.S. (1976), the arbitrage theory of capital asset pricing, journal of economic theory, 13, 341-360.
51.Serkanian, J., Raei, R., and Falahpor, S., (2015), the related to stock return and illiquidity in TSE, Journal of financial management prespective, 11: 9-26. (In Persian)
52.Shamamki, H. et al, (2016), Estimate of Market Risk Premium by Considering the Market Leverage in Tehran Stock Exchange, International Journal of Advanced Biotechnology and Research, 7, 2, 619-628.
53.Shanken, J., (2015), Comparison Asset Pricing Models, Financial Research Seminar Supported by Unigestion.
54.Sharp, W., (1964), Capital Asset Pricing: a theory of market equilibrium under condition of risk, Journal of Finance, 19, 48-54.
55.Sharpe. W. F, (1966), Mutual fund performance, the journal of business, 119-136.
56.Siegel, J. J. (1992), the Equity Premium: Stock and Bond Returns since 1802, Journal of Financial Analysis, (Jan-Feb), 28–38.
57.Vahabi, L., and Soroush yar, A., (2018), CAMP and Fuzzy return, Journal of financial management prespective, 22: 73-96. (In Persian).
58.Yaghoubnejad, A., Saeedi, A., and Rozeei, M., (2008), market risk premium and market leverage, Journal of financel research, 28: 105-120. (In Persian)
 
 
Financial Management Perspective
Volume 11, Issue 33
April 2021
Pages 9-31

Files

Share

How to cite

Statistics