Anomalies and Stock Returns: Australian Evidence
Monash University; Financial Research Network (FIRN)
T.A. PAI Management Institute, Finance Area
September 1, 2007
Prior research has identified the existence of several cross-sectional patterns in equity returns, commonly referred to as effects. This paper empirically tests for the existence of a number of well known effects using data from the Australian equities market. Specifically, we investigate the size effect, book-to-market effect, earnings to price effect, cash flow to price effect, leverage effect and the liquidity effect. Fama and French (1996) note that patterns in average returns that cannot be explained by the traditional Capital Asset Pricing Model (CAPM) are considered anomalies. An additional aim of this paper is to investigate the capability of the CAPM and the Fama and French (1993) multifactor model (FFM) in explaining any observed anomalies. We document a size, book to market, earnings to price and cash flow to price effect but fail to find evidence of a leverage or liquidity effect. Although our results indicate that the FFM is superior to the CAPM in explaining cross-sectional variation in equity returns, we conclude that its performance is less than satisfactory in Australia.
Number of Pages in PDF File: 30
Keywords: Anomalies, Fama-French model, Size effect, BE/ME effect
JEL Classification: G12, G14
Date posted: July 23, 2007 ; Last revised: November 6, 2008
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