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Which model best explains the returns of large Australian stocks?

Author

Listed:
  • Chai, Daniel
  • Chiah, Mardy
  • Gharghori, Philip

Abstract

Equity markets outside the US are generally dominated by small-sized stocks that are outside the investable universe of institutional investors and professional money managers. In this paper, we compare the performance of a range of competing factor models in pricing large Australian stocks. By doing so, we shed light on the mixed findings in prior studies and the issue of national and international pricing of assets. Using a comprehensive sample spanning a period of 35 years, we document that the Fama and French (2015) five-factor model is superior despite a few close matches with some of the competing models. As the sample expands from the top 300 to the top 500 stocks, the superiority of the five-factor model becomes more apparent. There is also evidence that profitability and investment factors help to explain the cross-section of stock returns. Finally, although large Australian stocks are integrated with the US market, domestic factors are more important drivers of expected returns in Australia.

Suggested Citation

  • Chai, Daniel & Chiah, Mardy & Gharghori, Philip, 2019. "Which model best explains the returns of large Australian stocks?," Pacific-Basin Finance Journal, Elsevier, vol. 55(C), pages 182-191.
    • Handle: RePEc:eee:pacfin:v:55:y:2019:i:c:p:182-191
    DOI: 10.1016/j.pacfin.2019.04.002
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    Citations

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    Cited by:

    1. Hoang, Khoa & Cannavan, Damien & Gaunt, Clive & Huang, Ronghong, 2019. "Is that factor just lucky? Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    2. Xiaoyue Chen & Bin Li & Andrew C. Worthington, 2022. "Economic uncertainty and Australian stock returns," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(3), pages 3441-3474, September.
    3. Asmâa ALAOUI TAIB & Safae BENFEDDOUL, 2023. "Explaining the time series of stock returns," Journal of Academic Finance, RED research unit, university of Gabes, Tunisia, vol. 14(2), pages 2-16, December.
    4. Simkus, Matthew & Truong, Helen & Hoang, Khoa & Huang, Ronghong, 2022. "Economic uncertainty and cross section of stock returns: Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    5. Huynh, Nhan, 2023. "Unemployment beta and the cross-section of stock returns: Evidence from Australia," International Review of Financial Analysis, Elsevier, vol. 86(C).
    6. Cakici, Nusret & Zaremba, Adam & Bianchi, Robert J. & Pham, Nga, 2021. "False discoveries in the anomaly research: New insights from the Stock Exchange of Melbourne (1927–1987)," Pacific-Basin Finance Journal, Elsevier, vol. 70(C).

    More about this item

    Keywords

    Anomalies; Asset pricing; Fama-French model; International equity;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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