The Relationship of Financial Factors in Asset Pricing: The Case of Indonesian Market

Humanities & Social Sciences Reviews, 2019

10 Pages Posted: 3 Feb 2020

See all articles by Sinta Aryani

Sinta Aryani

Bandung Institute of Technology - School of Business and Management

Sudarso Wiryono

Bandung Institute of Technology - School of Business and Management

Deddy P. Koesrindartoto

Bandung Institute of Technology - School of Business and Management

Date Written: October 18, 2019

Abstract

Purpose of the study: The study shows how the financial factor of Leverage affects the empirical model of asset pricing together with other financial factors, i.e. Size, Book to Market, Operating Profit, and Investment. The contribution of Leverage in asset pricing will be tested, and its effect will be shown in the excess return of the asset.

Methodology: The methodology used in this paper is based on the Fama and French model of asset pricing with additional factors added in the model. Data processing follows the Fama-Mc Beth procedure. Data comes from the Indonesian Stock Market, which consists of more than 500 stocks for ten years period of observation.

Main Findings: The financial factor of Leverage affects the empirical model of asset pricing together with, i.e. Size, Book to Market, Operating Profit, and Investment. All the financial factors in the model are stationary around their mean, or they are non-stationary due to unit-roots. All the independents' variables have P-Value less than 10%.

Implications: This study will be useful for financial investors in building an effective portfolio stock investment. By applying this model to their portfolio investment, the investors could effectively manage their portfolio return. On the management side, managing their financing structure, e.g. Leverage is the objective of the firm to maximize returns of the firms.

Novelty/Originality of this study: The empirical research with the involvement of the financial factor of Leverage has not been performed in Indonesia. The Leverage as the single factor of asset pricing has been considered as a significant financial factor for asset pricing, however, how the Leverage contributes to asset pricing compares to other financial factors has not examined yet.

Keywords: financial factors, asset pricing, Indonesian market, Leverage, diversified portfolio, Factors model

JEL Classification: E, G

Suggested Citation

Aryani, Sinta and Wiryono, Sudarso and Koesrindartoto, Deddy P., The Relationship of Financial Factors in Asset Pricing: The Case of Indonesian Market (October 18, 2019). Humanities & Social Sciences Reviews, 2019. Available at SSRN: https://ssrn.com/abstract=3472874

Sinta Aryani (Contact Author)

Bandung Institute of Technology - School of Business and Management ( email )

10 Ganesha Street
Gedung SBM-ITB
Bandung, West Java 40132
Indonesia

Sudarso Wiryono

Bandung Institute of Technology - School of Business and Management ( email )

10 Ganesha Street
Gedung SBM-ITB
Bandung, West Java 40132
Indonesia

Deddy P. Koesrindartoto

Bandung Institute of Technology - School of Business and Management ( email )

Jl. Ganesha 10
Gedung SBM-ITB
Bandung, West Java 40132
Indonesia

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