Understanding Cross-Sectional Variability in Equity Returns Using a Conditional Asset Pricing Model

Year 2023, , 395 - 424, 14.07.2023

Işıl Candemır

https://doi.org/10.17541/optimum.1285716

Abstract

A common practice in the literature examining Turkish equity premia involves the application of time-invariant models that assume the constancy of parameters across time. The present study examines whether the cross-sectional variability among equity returns can be explained by market, size, value and momentum factors and whether the parameters are time varying, utilizing a conditional asset pricing model formulated by Ferson and Harvey (1999). The study yields four main findings. Firstly, I find that the market dividend yield has a positive and significant effect on portfolio returns over the period from July 1989 to May 2021. Secondly, I reject the time-invariance in betas, while not rejecting it for alpha. Thirdly, none of the factors I examined have been priced, indicating that the four-asset pricing model is not sufficient to explain time-varying premia. Finally, the results are sensitive to the methodology employed for portfolio construction.

Keywords

Equity Risk Premium, Conditional Asset Pricing Models, Emerging Markets

Koşullu Varlık Fiyatlama Modeli Kullanarak Hisse Senedi Getirilerinde Kesitsel Varyasyonun Anlaşılması

Abstract

Türk hisse senetleri üzerine yapılan çalışmalarda genel olarak, parametrelerin zaman içerisinde değişmediğini varsayan modeller kullanılmaktadır. Bu çalışma, Ferson ve Harvey'in (1999) geliştirdiği koşullu varlık fiyatlama modelini kullanarak, hisse senedi getirileri arasındaki kesitsel değişkenliğin piyasa, büyüklük, değer ve momentum faktörleri tarafından açıklanabilirliğini ve parametrelerin zamanla değişip değişmediğini incelemektedir. Çalışma dört ana bulgu ortaya koymaktadır. İlk olarak, Temmuz 1989'dan Mayıs 2021'e kadar olan dönemde, piyasa temettü getirisinin, portföy getirileri üzerinde pozitif ve anlamlı bir etkiye sahip olduğu saptandı. İkinci olarak, betaların zaman içerisinde sabit kaldığı hipotezi reddedilirken, alfaların zaman içerisinde sabit kaldığı hipotezi reddedilmedi. Üçüncü olarak, incelenen faktörlerin hiçbirinin fiyatlandırılmadığı belirlendi, bu da dört varlık fiyatlandırma modelinin zamanla değişen primleri açıklamak için yeterli olmadığını göstermektedir. Son olarak, sonuçların, portföy oluşturma için kullanılan yönteme duyarlı olduğu tespit edildi.

Keywords

Hisse Senedi Risk Primi, Koşullu Varlık Fiyatlama Modellleri, Gelişmekte Olan Piyasalar

References

• Bruner, R. F., Conroy, R. M., Li, W., O’Halloran, E. F., & Lleras, M. P. (2003). Investing in emerging markets. Research Foundation of AIMR.
• Campbell, J. Y. (1987). Stock returns and the term structure. Journal of Financial Economics, 18(2), 373-399.
• Candemir, I., & Karahan, C. C. (2022). Determinants of time-varying equity risk premia in an emerging market. International Journal of Emerging Markets, (ahead-of-print).
• Carhart, M. M. (1997). On persistence in mutual fund performance. The Journal of Finance, 52(1), 57-82.
• Chaieb, I., Langlois, H., & Scaillet, O. (2021). Factors and risk premia in individual international stock returns. Journal of Financial Economics, 141(2), 669-692.
• Damodaran, A. (2014). Applied corporate finance (4th ed.). John Wiley & Sons.
• Fama, E. F., & French, K. R. (1988a). Permanent and temporary components of stock prices. Journal of Political Economy, 96(2), 246-273.
• Fama, E. F., & French, K. R. (1988b). Dividend yields and expected stock returns. Journal of Financial Economics, 22(1), 3-25.
• Fama, E. F., & French, K. R. (1992). The cross‐section of expected stock returns. The Journal of Finance, 47(2), 427-465.
• Fama, E. F., & MacBeth, J. D. (1973). Risk, return, and equilibrium: Empirical tests. Journal of political economy, 81(3), 607-636.
• Ferson, W. E. (1989). Changes in expected security returns, risk, and the level of interest rates. The Journal of Finance, 44(5), 1191-1217.
• Ferson, W. E., & Harvey, C. R. (1999). Conditioning variables and the cross section of stock returns. The Journal of Finance, 54(4), 1325-1360.
• Giglio, S., & Xiu, D. (2021). Asset pricing with omitted factors. Journal of Political Economy, 129(7), 1947-1990.
• Harvey, C. R. (1989). Time-varying conditional covariances in tests of asset pricing models. Journal of Financial Economics, 24(2), 289-317.
• Harvey, C. R. (1991). The world price of covariance risk. The Journal of Finance, 46(1), 111-157.
• Harvey, C. R. (1995). Predictable risk and returns in emerging markets. The review of financial studies, 8(3), 773-816.
• Jagannathan, R., & Wang, Z. (1996). The conditional CAPM and the cross‐section of expected returns. The Journal of Finance, 51(1), 3-53.
• Jegadeesh, N., Noh, J., Pukthuanthong, K., Roll, R., & Wang, J. (2019). Empirical tests of asset pricing models with individual assets: Resolving the errors-in-variables bias in risk premium estimation. Journal of Financial Economics, 133(2), 273-298.
• Karatepe, Y., Karaaslan, E., & Gokgoz, F. (2002). Conditional CAPM and an Application on the ISE. Istanbul Stock Exchange Review, 6(21), 21-36.
• Kelly, B. T., Pruitt, S., & Su, Y. (2020). Instrumented principal component analysis. Available at SSRN 2983919.
• Kim, M. J., Nelson, C. R., & Startz, R. (1991). Mean reversion in stock prices? A reappraisal of the empirical evidence. The Review of Economic Studies, 58(3), 515-528.
• Koller, T., Goedhart, M., & Wessels, D. (2020). Valuation: measuring and managing the value of companies (7th ed.). John Wiley & Sons.
• Lettau, M., & Ludvigson, S. (2001). Resurrecting the (C) CAPM: A cross-sectional test when risk premia are time-varying. Journal of Political Economy, 109(6), 1238-1287.
• Lewellen, J. (2004). Predicting returns with financial ratios. Journal of Financial Economics, 74(2), 209-235.
• Lewellen, J., Nagel, S., & Shanken, J. (2010). A skeptical appraisal of asset pricing tests. Journal of Financial Economics, 96(2), 175-194.
• Paye, B. S., & Timmermann, A. (2006). Instability of return prediction models. Journal of Empirical Finance, 13(3), 274-315.
• Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, 19(3), 425-442.
• Treynor, J. L. (1961). Market value, time, and risk. Time, and Risk (August 8, 1961).
• Yalçın, A., & Ersşahin, N. (2011). Does the conditional CAPM work? Evidence from the Istanbul Stock Exchange. Emerging Markets Finance and Trade, 47(4), 28-48.