Which model best explains the returns of large Australian stocks?

Research output: Contribution to journalArticleResearchpeer-review

Abstract

Equity markets outside the US are generally dominated by small-sized stocks that are outside the investable universe of institutional investors and professional money managers. In this paper, we compare the performance of a range of competing factor models in pricing large Australian stocks. By doing so, we shed light on the mixed findings in prior studies and the issue of national and international pricing of assets. Using a comprehensive sample spanning a period of 35 years, we document that the Fama and French (2015) five-factor model is superior despite a few close matches with some of the competing models. As the sample expands from the top 300 to the top 500 stocks, the superiority of the five-factor model becomes more apparent. There is also evidence that profitability and investment factors help to explain the cross-section of stock returns. Finally, although large Australian stocks are integrated with the US market, domestic factors are more important drivers of expected returns in Australia.

Original languageEnglish
Pages (from-to)182-191
Number of pages10
JournalPacific-Basin Finance Journal
Volume55
DOIs
Publication statusPublished - Jun 2019

Keywords

  • Anomalies
  • Asset pricing
  • Fama-French model
  • International equity

Cite this

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title = "Which model best explains the returns of large Australian stocks?",
abstract = "Equity markets outside the US are generally dominated by small-sized stocks that are outside the investable universe of institutional investors and professional money managers. In this paper, we compare the performance of a range of competing factor models in pricing large Australian stocks. By doing so, we shed light on the mixed findings in prior studies and the issue of national and international pricing of assets. Using a comprehensive sample spanning a period of 35 years, we document that the Fama and French (2015) five-factor model is superior despite a few close matches with some of the competing models. As the sample expands from the top 300 to the top 500 stocks, the superiority of the five-factor model becomes more apparent. There is also evidence that profitability and investment factors help to explain the cross-section of stock returns. Finally, although large Australian stocks are integrated with the US market, domestic factors are more important drivers of expected returns in Australia.",
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Which model best explains the returns of large Australian stocks? / Chai, Daniel; Chiah, Mardy; Gharghori, Philip.

In: Pacific-Basin Finance Journal, Vol. 55, 06.2019, p. 182-191.

Research output: Contribution to journalArticleResearchpeer-review

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