IDEAS home Printed from https://ideas.repec.org/a/fst/rfsisf/v16y2024i9p11-22.html
   My bibliography  Save this article

The Impact of Financial Leverage on the Pricing Risk in the Egyptian Stock Market

Author

Listed:
  • Mustafa Hussein Abd-Allah

    (Sadat Academy for Management Sciences, Cairo, Egypt)

  • Wael Ibrahim Abdelrahim Hamimy

    (Sadat Academy for Management Sciences, Cairo, Egypt)

Abstract

This paper examines the impact of financial leverage on the risk pricing in the Egyptian Stock Exchange (EGX) by adding an additional risk factor reflecting financial leverage to the three factor model of Fama and French. We used monthly excess stock returns of 50 stocks listed on the (EGX) from January 2014 to December 2018 to test Fama and French model before and after adding the financial leverage factor. Total debt to equity ratio was used to calculate the financial leverage. The results do not support Fama and French model before and after adding the financial leverage factor, therefore there is no effect of financial leverage on the risk pricing.

Suggested Citation

  • Mustafa Hussein Abd-Allah & Wael Ibrahim Abdelrahim Hamimy, 2024. "The Impact of Financial Leverage on the Pricing Risk in the Egyptian Stock Market," Journal of Financial Studies, Institute of Financial Studies, vol. 16(9), pages 11-22, May.
  • Handle: RePEc:fst:rfsisf:v:16:y:2024:i:9:p:11-22
    DOI: 10.55654/JFS.2024.9.16.01
    as

    Download full text from publisher

    File URL: https://revista.isfin.ro/wp-content/uploads/2024/05/1.-Mustafa-Hussein-Abd-Allah-et..pdf
    Download Restriction: no

    File URL: https://revista.isfin.ro/2024/05/25/the-impact-of-financial-leverage-on-the-risk-pricing-in-the-egyptian-stock-market/
    Download Restriction: no

    File URL: https://libkey.io/10.55654/JFS.2024.9.16.01?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Reinganum, Marc R., 1981. "A New Empirical Perspective on the CAPM," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(4), pages 439-462, November.
    3. Jiri Novak & Dalibor Petr, 2010. "CAPM Beta, Size, Book-to-Market, and Momentum in Realized Stock Returns," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(5), pages 447-460, December.
    4. Hamada, Robert S, 1969. "Portfolio Analysis, Market Equilibrium and Corporation Finance," Journal of Finance, American Finance Association, vol. 24(1), pages 13-31, March.
    5. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    6. Fred D. Arditti, 1967. "Risk And The Required Return On Equity," Journal of Finance, American Finance Association, vol. 22(1), pages 19-36, March.
    7. Wong, Kie Ann, 1989. "The firm size effect on stock returns in a developing stock market," Economics Letters, Elsevier, vol. 30(1), pages 61-65.
    8. Maroney, Neal & Naka, Atsuyuki & Wansi, Theresia, 2004. "Changing Risk, Return, and Leverage: The 1997 Asian Financial Crisis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(1), pages 143-166, March.
    9. repec:bla:jfinan:v:43:y:1988:i:2:p:507-28 is not listed on IDEAS
    10. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
    11. Fama, Eugene F & French, Kenneth R, 1995. "Size and Book-to-Market Factors in Earnings and Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 131-155, March.
    12. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    13. Chan, K C & Chen, Nai-Fu, 1991. "Structural and Return Characteristics of Small and Large Firms," Journal of Finance, American Finance Association, vol. 46(4), pages 1467-1484, September.
    14. Black, Fischer, 1972. "Capital Market Equilibrium with Restricted Borrowing," The Journal of Business, University of Chicago Press, vol. 45(3), pages 444-455, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Martin Wallmeier, 2000. "Determinanten erwarteter Renditen am deutschen Aktienmarkt — Eine empirische Untersuchung anhand ausgewählter Kennzahlen," Schmalenbach Journal of Business Research, Springer, vol. 52(1), pages 27-57, February.
    2. Fernando Rubio, 2005. "Eficiencia De Mercado, Administracion De Carteras De Fondos Y Behavioural Finance," Finance 0503028, University Library of Munich, Germany, revised 23 Jul 2005.
    3. Chou, Pin-Huang & Ko, Kuan-Cheng & Lin, Shinn-Juh, 2010. "Do relative leverage and relative distress really explain size and book-to-market anomalies?," Journal of Financial Markets, Elsevier, vol. 13(1), pages 77-100, February.
    4. Pinfold, John F. & Wilson, William R. & Li, Qiuli, 2001. "Book-to-market and size as determinants of returns in small illiquid markets: the New Zealand case," Financial Services Review, Elsevier, vol. 10(1-4), pages 291-302.
    5. D. L. Wilcox & T. J. Gebbie, 2013. "On pricing kernels, information and risk," Papers 1310.4067, arXiv.org, revised Oct 2013.
    6. De Moor, Lieven & Sercu, Piet, 2013. "The smallest firm effect: An international study," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 129-155.
    7. Anton Astakhov & Tomas Havranek & Jiri Novak, 2019. "Firm Size And Stock Returns: A Quantitative Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 33(5), pages 1463-1492, December.
    8. Jiri Novak, 2015. "Systematic Risk Changes, Negative Realized Excess Returns and Time-Varying CAPM Beta," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 65(2), pages 167-190, April.
    9. Don U.A. Galagedera, 2004. "A survey on risk-return analysis," Finance 0406010, University Library of Munich, Germany.
    10. Amir Amel†Zadeh, 2011. "The Return of the Size Anomaly: Evidence from the German Stock Market," European Financial Management, European Financial Management Association, vol. 17(1), pages 145-182, January.
    11. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, August.
    12. Sonntag, Dominik, 2018. "Die Theorie der fairen geometrischen Rendite [The Theory of Fair Geometric Returns]," MPRA Paper 87082, University Library of Munich, Germany.
    13. Monia Ben Ltaifa & Walid Khoufi, 2016. "Book to Market and Size as Determinants of Stock Returns of Banks: An Empirical Investigation from MENA Countries," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 6(4), pages 142-160, October.
    14. Wu, Xueping, 2002. "A conditional multifactor analysis of return momentum," Journal of Banking & Finance, Elsevier, vol. 26(8), pages 1675-1696, August.
    15. Committee, Nobel Prize, 2013. "Understanding Asset Prices," Nobel Prize in Economics documents 2013-1, Nobel Prize Committee.
    16. Silva, Thiago Christiano & Wilhelm, Paulo Victor Berri & Tabak, Benjamin Miranda, 2023. "The effect of interconnectivity on stock returns during the Global Financial Crisis," The North American Journal of Economics and Finance, Elsevier, vol. 67(C).
    17. Chandra Shekhar Bhatnagar & Riad Ramlogan, 2012. "The capital asset pricing model versus the three factor model: A United Kingdom Perspective," International Journal of Business and Social Research, LAR Center Press, vol. 2(1), pages 51-65, February.
    18. Kateryna Shapovalova & Alexander Subbotin, 2007. "Investigating value and growth: what labels hide?," Post-Print halshs-00188339, HAL.
    19. Dar-Hsin Chen & Chun-Da Chen & Su-Chen Wu, 2014. "VaR and the cross-section of expected stock returns: an emerging market evidence," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 15(3), pages 441-459, June.
    20. Oghenovo A. Obrimah, 2023. "Underpricing of initial public offerings (IPOs) and the credibility of underwriters’ pricing services," SN Business & Economics, Springer, vol. 3(2), pages 1-33, February.

    More about this item

    Keywords

    Fama and French three-factor model; Financial leverage.;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fst:rfsisf:v:16:y:2024:i:9:p:11-22. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Cosmin Catalin Olteanu (email available below). General contact details of provider: https://edirc.repec.org/data/isfinro.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.