Sage Journals: Discover world-class research

Abstract

This article examines whether the alternative asset pricing models and more specifically the liquidity-augmented multifactor models can explain the effect of size, value, momentum and liquidity on cross section of stock returns in India during September 1995 to March 2011. We employ time series and panel data methodology to carry out the analysis. Our findings suggest that the value and liquidity effects are often explained, but the explanatory power of size and short-run past return or momentum effect remain consistent irrespective of alternative asset pricing models risk adjustment process. The liquidity-augmented multifactor models are found to have better explanatory power than to the other alternative multifactor models. The relative performance of liquidity-augmented multifactor modes for capturing the role of firm characteristics on stock returns varies across the individual firms’ liquidity sensitivity and the aggregate market liquidity conditions.

JEL Classification: G11, G12, G14, G15

Keywords

Emerging market liquidity effect momentum effect multifactor model stock returns

Get full access to this article

View all access options for this article.

References

Amihud

(2002), ‘Illiquidity and Stock Returns: Cross-section and Time-series Effects’, Journal of Financial Markets, 5(1): 31–56.

Ansari

V. A.

Khan

(2012), ‘Momentum Anomaly: Evidence from India’, Managerial Finance, 38(2): 206–23.

Artmann

Finter

Kempf

(2012), ‘Determinants of Expected Stock Returns: Large Sample Evidence from the German Market’, Journal of Business Finance and Accounting, 39(5–6): 758–84.

Asness

C. S.

(1997), ‘The Interaction of Value and Momentum Strategies’, Financial Analysts’ Journal, 53(2): 29–36.

Avramov

Chordia

(2006), ‘Asset Pricing Models and Financial Market Anomalies’, Review of Financial Studies, 19(3): 1001–40.

Banz

R. W.

(1981), ‘The Relationship Between Return and Market Value of Common Stocks’, Journal of Financial Economics, 9(1): 3–18.

Basu

(1977), Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis’, Journal of Finance, 32(3): 663–82.

Bauer

Cosemans

Schotman

P. C.

(2010), ‘Conditional Asset Pricing and Stock Market Anomalies in Europe’, European Financial Management, 16(2): 165–90.

Bekaert

Harvey

R. C.

(2003), Emerging Markets Finance’, Journal of Empirical Finance, 10(1–2): 3–55.

10.

Bekaert

Harvey

C. R.

Lundblad

(2007), ‘Liquidity and Expected Returns: Lessons from Emerging Markets’, The Review of Financial Studies, 20(5): 1783–831.

11.

Brennan

M. J.

Chordia

Subrahmanyam

(1998), ‘Alternative Factor Specifications, Security Characteristics, and the Cross-section of Expected Stock Returns’, Journal of Financial Economics, 49(3): 345–73.

12.

Breusch

T. S.

Pagan

A. R.

(1980), The Lagrange Multiplier Test and Its Applications to Model Specification in Econometrics, Review of Economic Studies, 47(1): 239–53.

13.

Brockman

Chung

D. Y.

(2002), ‘Commonality in Liquidity: Evidence from an Order-Driven Market Structure’, Journal of Financial Research, 25(4): 521–39.

14.

Carhart

M. M.

(1997), ‘On Persistence in Mutual Fund Performance’, Journal of Finance, 52(1): 57–82.

15.

Chana

Hameed

(2006), ‘Stock Price Synchronicity and Analyst Coverage in Emerging Markets’, Journal of Financial Economics, 80(1): 115–47.

16.

Chen

Kim

K. A.

Yaoc

(2010), ‘On the Predictability of Chinese Stock Returns’, Pacific-Basin Finance Journal, 18(4): 403–25.

17.

Chou

P. H.

Kob

K. C.

Lin

S. J.

(2010), ‘Do Relative Leverage and Relative Distress Really Explain Size and Book-to-market Anomalies?’ Journal of Financial Markets, 13(1): 77–100.

18.

Classens

Dasgupta

Glen

(1998), ‘The Cross Section of Stock Returns: Evidence from the Emerging Markets’, Emerging Market Quarterly, 9(1): 4–13.

19.

Dash

S. R.

Mahakud

(2012), ‘Investor Sentiment, Risk Factors and Stock Return: Evidence from Indian Non-financial Companies’, Journal of Indian Business Research, 4(3): 194–218.

20.

Dichev

I. D.

(1998), ‘Is the Risk of Bankruptcy a Systematic Risk?’ Journal of Finance, 53(3): 1131–47.

21.

Fama

E. F.

MacBeth

(1973), ‘Risk Return and Equilibrium: Empirical Tests’, Journal of Political Economy, 81(3): 607–36.

22.

Fama

E. F.

French

K. R.

(1992), ‘The Cross-section of Expected Stock Returns’, Journal of Finance, 47(2): 427–65.

23.

Fama

E. F.

French

K. R.

(1993), Common Risk Factors in the Returns on Stocks and Bonds, Journal of Financial Economics, 33(1): 3–56.

24.

Fama

E. F.

French

K. R.

(1996), ‘Multifactor Explanations of Asset Pricing Anomalies’, Journal of Finance, 51(1): 55–84.

25.

Fama

E. F.

French

K. R.

(1998), ‘Value versus Growth: The International Evidence’, The Journal of Finance, 53(6): 1975–1999.

26.

Fama

E. F.

French

K. R.

(2012), ‘Size, Value, and Momentum in International Stock Returns’, Journal of Financial Economics, 105(3): 457–72.

27.

Fang

Noe

Tice

(2009), ‘Stock Market Liquidity and Firm Value’, Journal of Financial Economics, 94(1): 150–69.

28.

Gourieroux

Holly

Monfort

(1982), ‘Likelihood Ratio Test, Wald Test, and Kuhn-Tucker Test in Linear Models with Inequality Constraints on the Regression Parameters’, Econometrica, 50(1): 63–80.

29.

Griffin

J. M.

(2002), ‘Are the Fama and French Factors Global or Country Specific?’ The Review of Financial Studies, 15(3): 783–803.

30.

Groot

Verschoor

W. F. C.

(2002), ‘Further Evidence on Asian Stock Return Behavior’, Emerging Markets Review, 3(2): 179–93.

31.

Hart

J. van-der

Slagter

van Dijk

(2003), ‘Stock Selection Strategies in Emerging Markets’, Journal of Empirical Finance, 10(1–2): 105–32.

32.

Hausman

J. A.

(1978), Specification Tests in Econometrics, Econometrica, 46(6): 1251–71.

33.

Her

L. J. F.

Masmoudi

Suret

M. J.

(2004), ‘Evidence to Support the Four Factor Pricing Model from the Canadian Stock Market’, Journal of International Financial Markets, 14(4): 313–28.

34.

Jegadeesh

Titman

(1993), ‘Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency’, Journal of Finance, 48(1): 65–91.

35.

Jun

S. G.

Marathe

Shawky

A. H.

(2003), ‘Liquidity and Stock Returns in Emerging Equity Markets’, Emerging Markets Review, 4(1): 1–24.

36.

Keene

A. M.

Peterson

R. D.

(2007), ‘The Importance of Liquidity as a Factor in Asset Pricing’, Journal of Financial Research, 30(1): 91–109.

37.

Lam

K. S. K.

Tam

K. H. L.

(2011), ‘Liquidity and Asset Pricing: Evidence from the Hong Kong Stock Market’, Journal of Banking and Finance, 35(9): 2217–30.

38.

Lintner

(1965), ‘The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets’, Review of Economics and Statistics, 47(1): 13–37.

39.

Lischewski

Voronkova

(2012), ‘Size, Value and Liquidity. Do They Really Matter on an Emerging Stock Market?’ Emerging Markets Review, 13(1): 8–25.

40.

Liu

(2006), A Liquidity Augmented Capital Asset Pricing Model’, Journal of Financial Economics, 82(3): 631–71.

41.

A. W.

Mackinlay

A. C.

(1990), ‘Data-snooping Biases in Tests of Financial Asset Pricing Models’, Review of Financial Studies, 3(3): 431–67.

42.

Martinez

M. A.

Nieto

Rubio

Tapia

(2005), ‘Asset Pricing and Systematic Liquidity Risk: an Empirical Investigation of the Spanish Stock Market’, International Review of Economic and Finance, 14(1): 81–103.

43.

Merton

R. C.

(1973), ‘An Intertemporal Capital Asset Pricing Model’, Econometrica, 41(5): 867–87.

44.

Misra

A. K.

Mahakud

(2009), ‘Emerging Trends in Financial Markets Integration’, International Journal of Emerging Markets, 4(3): 235–51.

45.

Mohanty

(2002), ‘Evidence of Size Effect on Indian Stock Returns’, Vikalpa, 27(3): 27–37.

46.

Moor

L. D.

Sercu

(2013), ‘The Smallest Firm Effect: An International Study’, Journal of International Money and Finance, 32: 129–55.

47.

Morck

Yeung

(2000), ‘The Information Content of Stock Markets: Why Do Emerging Markets Have Synchronous Stock Price Movements?’ Journal of Financial Economics, 58(1–2): 215–60.

48.

Narayan

K. P.

Zheng

(2010), Market Liquidity Risk Factor and Financial Market Anomalies: Evidence from the Chinese Stock Market, Pacific-Basin Finance Journal, 18(2): 509–20.

49.

Pastor

Stambaugh

R. F.

(2003), ‘Liquidity Risk and Expected Stock Returns’, Journal of Political Economy, 111(3): 642–85.

50.

Roll

(1977), ‘A Critique of the Asset Pricing Theory’s Tests: On Past and Potential Testability of Theory’, Journal of Financial Economics, 4(2): 129–76.

51.

Rouwenhorst

K. G.

(1999), ‘Local Return Factors and Turnover in Emerging Stock Markets’, Journal of Finance, 54(4): 1439–64.

52.

Schwert

G. W.

(2003), Anomalies and Market Efficiency, Handbook of the Economics of Finance. Amsterdam, North Holland.

53.

Sehgal

Jain

(2011), Short-term Momentum Patterns in Stock and Sectoral Returns: Evidence from India’, Journal of Advances in Management Research, 8(1): 99–122.

54.

Shanken

(1992), ‘On the Estimation of Beta-Pricing Models’, Review of Financial Studies, 5(1): 1–33.

55.

Sharpe

W. F.

(1964), ‘Capital Asset Prices: A theory of Market Equilibrium under Conditions of Risk’, Journal of Finance, 19(3): 425–42.

56.

Xing

Anderson

(2011), ‘Stock Price Synchronicity and Public Firm-specific Information’, Journal of Financial Markets, 14(2): 115–47.

Do Asset Pricing Models Explain Size,Value,Momentum and Liquidity Effects? The Case of an Emerging Stock Market

Abstract

Keywords

Get full access to this article

References