A Comparison of the Efficacy of Liquidity, Momentum, Size and Book-to-Market Value Factors in Equity Pricing on a Heterogeneous Sample: Evidence from Asia

59 Pages Posted: 22 Jan 2016

Date Written: January 19, 2016

Abstract

This paper compares the size and book-to-market value factors of Fama and French (1993) alongside Momentum of Jagadeesh and Titman (1993) with two Liu (2006) liquidity factors formed from 1 year rebalancing and 1 month rebalancing respectively. A heterogeneous and comprehensive sample of the top blue chip stocks of all national Asian equity markets with further differentiation undertaken between sub samples formed for Japan only and Asia excluding Japan for period January 2000 to August 2014. Our empirical results suggest that multifactor time invariant pricing models based on augmented capital asset pricing model (CAPM) framework are ineffective in explaining the cross section of stock returns in the presence of significant inter and intra-market segmentation. However an alternative model specification based on a time varying parameter specification and using same sets of factors yields significant enhancements in explaining cross section of stock returns across universe. We find that momentum factor largely lacks significance while a time varying two factor model, based on CAPM plus liquidity factor, is optimal. The liquidity factor being that of Liu (2006) and annually rebalanced. Our findings are important for investment managers seeking appropriate factors and modelling techniques to hedge against risks as well as firm's financial managers seeking to reduce costs of equity capital.

Keywords: Liquidity, CAPM, Emerging Financial Markets, Asia

JEL Classification: G11, G12, G15, O55

Suggested Citation

Hearn, Bruce Allen, A Comparison of the Efficacy of Liquidity, Momentum, Size and Book-to-Market Value Factors in Equity Pricing on a Heterogeneous Sample: Evidence from Asia (January 19, 2016). Available at SSRN: https://ssrn.com/abstract=2718696 or http://dx.doi.org/10.2139/ssrn.2718696

Bruce Allen Hearn (Contact Author)

University of Southampton ( email )

University Rd.
Southampton SO17 1BJ, Hampshire SO17 1LP
United Kingdom

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