IDEAS home Printed from https://ideas.repec.org/a/spt/fininv/v5y2016i3f5_3_3.html
   My bibliography  Save this article

Explaining Stock Returns in Nepal: Application of Single and Multi-factor models

Author

Listed:
  • Dipesh Karki
  • Binam Ghimire

Abstract

This paper investigates the relevance of CAPM single factor and Fama-French three factor (Fama-French) models to explain the return for cross sectional portfolios in the context of Nepalese stock market. We use stock market data and treasury bill rate over the period of August 2007 to July 2013 and estimate the factor models after correcting for the violation of classical linear regression assumptions. Our results show that in all five portfolios (B/L, B/M, B/H, S/M, S/H), three factor model has better explanatory power over CAPM. The estimations of Fame-French showed that Excess market return (ER) and Value factor are more significant than Size factor in model fitting. Finally, the study tested for the seasonality in Nepalese stock return using the dummy variable. The results showed significant seasonality effect for fiscal year end thus indicating possibility of tax loss effect in Nepalese stock market but seasonality effect on account of festival period is found to be insignificant.

Suggested Citation

  • Dipesh Karki & Binam Ghimire, 2016. "Explaining Stock Returns in Nepal: Application of Single and Multi-factor models," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 5(3), pages 1-3.
    • Handle: RePEc:spt:fininv:v:5:y:2016:i:3:f:5_3_3
    as

    Download full text from publisher

    File URL: http://www.scienpress.com/Upload/JFIA%2fVol%205_3_3.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Davis, James L, 1994. "The Cross-Section of Realized Stock Returns: The Pre-COMPUSTAT Evidence," Journal of Finance, American Finance Association, vol. 49(5), pages 1579-1593, December.
    2. 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.
    3. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    4. 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.
    5. Roll, Richard, 1977. "A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory," Journal of Financial Economics, Elsevier, vol. 4(2), pages 129-176, March.
    6. Yash Pal Taneja, 2010. "Revisiting Fama French Three-Factor Model in Indian Stock Market," Vision, , vol. 14(4), pages 267-274, October.
    7. Keim, Donald B., 1983. "Size-related anomalies and stock return seasonality : Further empirical evidence," Journal of Financial Economics, Elsevier, vol. 12(1), pages 13-32, June.
    8. Pettengill, Glenn N. & Sundaram, Sridhar & Mathur, Ike, 1995. "The Conditional Relation between Beta and Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(1), pages 101-116, March.
    9. 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.
    10. MOSSIN, Jan, 1968. "Optimal multiperiod portfolio policies," LIDAM Reprints CORE 19, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    11. Allen, D. E. & Cleary, F., 1998. "Determinants of the cross-section of stock returns in the Malaysian stock market," International Review of Financial Analysis, Elsevier, vol. 7(3), pages 253-275.
    12. Keith Lam & Frank Li & Simon So, 2010. "On the validity of the augmented Fama and French’s (1993) model: evidence from the Hong Kong stock market," Review of Quantitative Finance and Accounting, Springer, vol. 35(1), pages 89-111, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Roshan Sedhain & S. Shijin, 2023. "Expectations and Stock Market in Nepal," Vision, , vol. 27(5), pages 671-679, November.

    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. Shahzad, Syed Jawad Hussain & Zakaria, Muhammad & Raza, Naveed, 2014. "Sensitivity Analysis of CAPM Estimates: Data Frequency and Time Frame," MPRA Paper 60110, University Library of Munich, Germany.
    2. Shum, Wai Cheong & Tang, Gordon Y.N., 2005. "Common risk factors in returns in Asian emerging stock markets," International Business Review, Elsevier, vol. 14(6), pages 695-717, December.
    3. 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.
    4. Bernard Bollen, 2010. "The security market plane," Applied Financial Economics, Taylor & Francis Journals, vol. 20(15), pages 1231-1240.
    5. Trabelsi, Mohamed Ali, 2010. "Choix de portefeuille: comparaison des différentes stratégies [Portfolio selection: comparison of different strategies]," MPRA Paper 82946, University Library of Munich, Germany, revised 01 Dec 2010.
    6. Frankfurter, George M. & Phillips, Herbert E., 1996. "Normative implications of equilibrium models: Homogeneous expectations and other artificialities," Journal of Economic Behavior & Organization, Elsevier, vol. 31(1), pages 67-83, October.
    7. Radosław Kurach, 2013. "Does Beta Explain Global Equity Market Volatility – Some Empirical Evidence," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 7(2), June.
    8. Gabriel Hawawini & Donald B. Keim, "undated". "The Cross Section of Common Stock Returns: A Review of the Evidence and Some New Findings," Rodney L. White Center for Financial Research Working Papers 08-99, Wharton School Rodney L. White Center for Financial Research.
    9. Bernard Bollen & Philip Gharghori, 2016. "How is β related to asset returns?," Applied Economics, Taylor & Francis Journals, vol. 48(21), pages 1925-1935, May.
    10. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, August.
    11. Ebrahim, M. Shahid & Girma, Sourafel & Shah, M. Eskandar & Williams, Jonathan, 2014. "Rationalizing the value premium in emerging markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 51-70.
    12. Kie Wong & Ruth Tan & Wei Liu, 2006. "The Cross-Section of Stock Returns on The Shanghai Stock Exchange," Review of Quantitative Finance and Accounting, Springer, vol. 26(1), pages 23-39, February.
    13. Committee, Nobel Prize, 2013. "Understanding Asset Prices," Nobel Prize in Economics documents 2013-1, Nobel Prize Committee.
    14. Christian Walkshäusl & Sebastian Lobe, 2014. "The Alternative Three†Factor Model: An Alternative beyond US Markets?," European Financial Management, European Financial Management Association, vol. 20(1), pages 33-70, January.
    15. Asgar Ali & K. N. Badhani, 2021. "Beta-Anomaly: Evidence from the Indian Equity Market," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 28(1), pages 55-78, March.
    16. M. Eskandar Shah & Sourafel Girm & R. Hudson, 2012. "Rationalizing the Value Premium under Economic Fundamentals in an Emerging Market," Working Papers 12010, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    17. van Dijk, Mathijs A., 2011. "Is size dead? A review of the size effect in equity returns," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3263-3274.
    18. 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.
    19. Wang, Yuenan & Di Iorio, Amalia, 2007. "The cross section of expected stock returns in the Chinese A-share market," Global Finance Journal, Elsevier, vol. 17(3), pages 335-349, March.
    20. Vendrame, Vasco & Guermat, Cherif & Tucker, Jon, 2018. "A conditional regime switching CAPM," International Review of Financial Analysis, Elsevier, vol. 56(C), pages 1-11.

    More about this item

    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:spt:fininv:v:5:y:2016:i:3:f:5_3_3. 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: Eleftherios Spyromitros-Xioufis (email available below). General contact details of provider: http://www.scienpress.com/ .

    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.