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Asset Pricing Puzzle: New Evidence of Fama-French Five-Factors in Emerging Market Perspectives

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  • Hossain Mohammed Sawkat

    (Department of Finance and Banking, Jahangirnagar University, Bangladesh.)

Abstract

The asset pricing theory introduced by Fama and French (2015) documents five systematic common risk factors for equity valuation, such as: (a) market beta, (b) firm size, (c) firm value, (d) profitability and (e) investment strategy. However, corporate finance literature does not provide us with a particularly robust check if the FF5 model is equally exposed to estimate equity returns in an emerging market. Hence, based on Fama and Macbeth (1973) as well as Fama and French (1993, 2015, 2020), this paper applies multivariate regression (time series & cross-sectional) analysis for the robust test of common risk factors and risk premia respectively in an emerging market context, and finally validates that all of the systematic risk factors are significant except firm profitability and investment strategy. We found that the distinguishing semi-strong level of market efficiency influences the explanatory power of the underlying risk exposure for stock return performance differently in an emerging market. The finding could be important in estimating equity fair pricing that is yet to be examined for an emerging market. Therefore, with the reconfirmedthree significant common risk factors, the market practitioners, policy makers, financial analysts, and, above all, investors can estimate equity value appropriately, and thereby take optimal financial and investment decisions.

Suggested Citation

  • Hossain Mohammed Sawkat, 2022. "Asset Pricing Puzzle: New Evidence of Fama-French Five-Factors in Emerging Market Perspectives," Real Estate Management and Valuation, Sciendo, vol. 30(3), pages 73-85, September.
    • Handle: RePEc:vrs:remava:v:30:y:2022:i:3:p:73-85:n:3
    DOI: 10.2478/remav-2022-0022
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    References listed on IDEAS

    as
    1. Kafouros, Mario & Aliyev, Murod, 2016. "Institutional development and firm profitability in transition economies," Journal of World Business, Elsevier, vol. 51(3), pages 369-378.
    2. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
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    More about this item

    Keywords

    asset pricing theory; systematic risks FF5 model; security pricing; time series; cross-sectional analysis;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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