Explaining the time series of stock returns

comparative study on the Moroccan market

Authors

  • Asmâa ALAOUI TAIB the National School of Business and Management, Sidi Mohamed Ben Abdallah University, Fez, Morocco
  • Safae BENFEDDOUL The National School of Business and Management, Sidi Mohamed Ben Abdallah University, Fez, Morocco

DOI:

https://doi.org/10.59051/joaf.v14i2.634

Keywords:

CAPM, Fama and French three-factor model (1993), Moroccan market, time series data

Abstract

Abstract:

Objective: In this paper, we test and compare the explanatory power of the two asset pricing models: the conventional CAPM and the empirical Fama and French three-factor model (1993) in the Moroccan stock market.

Method: According to the Fama and French (1993) methodology, we analyze monthly data covering the sample period from July 2012 to June 2020.

Results: The main findings support the superiority of the Fama and French three-factor model. The mimic risk factors pertained to the size and the book-to-market ratio have a significant role in explaining the Moroccan returns. Moreover, results show the existence of weak value effect but significant size effect. Despite the preeminence of the Fama and French model in describing the time-series of sock returns, the model leaves an unexplained fraction of the variation of Moroccan stock returns.

Originality/Relevance: Our study is the first to compare the two popular models in the financial literature in the Moroccan stock which is an emerging market. Thus, our study corroborates others studies conducted in emerging markets and confirms the hypothesis that the characteristics of those markets impact the explanatory power of asset pricing models.  

Downloads

Download data is not yet available.

References

Achola, N. K., and Muriu, P. W. (2016). «Testing The Three Factor Model of Fama and French: Evidence From An Emerging Market». European Scientific Journal, 12(16), 211-236, doi:10.19044/esj.2016.v12n16p211

Aftalion, F. (2003). «La nouvelle Finance et la gestion des portefeuilles». 2ème édition, Economica.

Aguenaou, S., Abrache, J., El Kadiri, B. (2011). «Testing The Fama French Three Factor Model in The Moroccan Stock Market». International Journal of Business, Accounting and Finance, 5(2), 57-66.

Ajlouni, M. M., Khasawneh, M. (2017). «Empirical Test of Fama and French Three-Factor Model in Amman Stock Exchange». European Scientific Journal, 13 (10). doi: 10.19044/esj.2017.v13n10p%p

Akhtruzzaman, M., Docherty, P. and Shamsuddin, A. (2014). «Interest rate, size and book-to-market effects in Australian financial firms». Applied Economics, 46(25), 3005-3020, doi: 10.1080/00036846.2014.920478

Ali, F., He, R.,and Jiang, Y.(2018). «Size, Value and Business Cycle Variables. The Three-Factor Model and Future Economic Growth : Evidence from an Emerging Market». Economies 2018, 6(14), doi: 10.3390/economies6010014w

Barry, C. B., Goldreyer, E., Lockwood, L. and Rodriguez, M. (2002). «Robustness of size and value effects in emerging equity markets, 1985-2000». Emerging markets Review, 3(1), 1-30.

Bekaert G., Erb C., Campbell Havery et Tadas Viskanta. (1996). «The Cross Sectional Determinants of Emerging Equity Market Returns», doi: 10.2139/ssrn.826454

Bhatnagar, C. S., and Ramlogan, R. (2012). «The Capital Asset Pricing Model versus the three-factor model: A United Kingdom perspective». International Journal of Business and Social Research, 2(1), 51-65.

Bundoo, S. K., (2008). «An Augmented Fama and French three factor model: new evidence from an emerging stock market». Applied Economics Letters, 15(15), 1213-1218.

Charitou A. and Constantinidis E. (2004). «Size and Book-to-Market Factors in Earnings and Stock Returns: Empirical Evidence for Japan». Illinois International Accounting Summer Conferences Working Paper.

Chai, D., Chiah, M., Gharghori, P. (2019). «Which model best explains the returns of large Australian stocks?». Pacific-Basin Finance Journal, 55, 182-191.

Claessens S., Dagusta S. et Glen J.D. (1995). «Return behavior in emerging stock markets». The world Bank Economic Review, 9(1), 131-151.

Claessens S., Dagusta S. et Glen J.D. (1998). «The cross-section of stock returns: Evidence from the emerging markets». Emerging Markets Quarterly, 2(1), 4-13.

Cochrane, J.H. (1999). «New Facts in Finance». Economic Perspectives, Federal Reserve Bank of Chicago, doi: 10.3386/w7169

Djajadikerta H.G. et Nartea G.V (2005). «The Size and Book-to-Market Effects and the Fama-French Three-Factor Model in Small Markets: Preliminary Findings from New Zealand». School of Accounting, Finance and Economics & FIMARC Working Paper Series, Cowan University.

Dolinar, D. (2013). «Test of the Fama-French three-factor model in Croatia». UTMS Journal of Economics, 4(2), 101-112.

Drew, M. E., Naughton, T., Veeraraghavan, M. (2003). «Asset Pricing in China: Evidence from the Shanghai Stock Exchange». Disscussion paper n°128, Queensland University of Technology.

Eraslan, V. (2013). «Fama and French Three-Factor Model: Evidence From Istanbul Stock exchange». Business and Economics Research Journal, 4(2), 11-22.

Fama, E.F., French, K.R. (1992). «The Cross-Section of Expected Stock Returns». Journal of Finance, 47(2), 427-465.

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.

Fama, E.F., French, K.R. (1998). «Value versus Growth: The International Evidence». Journal of Finance, 53(6), 1975-1999.

Fama, E.F., French, K.R. (2012). «Size, value, and momentum in international stock returns». Journal of Financial Economics, 105(3), 457-472.

Fama, E.F., French, K.R. (2015). «A five-factor asset pricing model». Journal of Financial Economics, 116(1), 1-22.

Gaunt, C., (2004). «Size and book-to-market effects and the Fama and French three-factor asset pricing model: evidence from the Australian stock market». The Journal of Accounting and Finance, 44(1), 27-44.

Griffin, J. M., (2002). «Are the Fama and French Factors Global or Country Specific?». The review of Financial Studies, 15 (3), 783-803.

Karp, A., Vuuren, G. V., (2017). «The Capital Asset Pricing Model And Fama-French Three Factor Model In An Emerging Market Environment». International Business and Economics Research Journal, 16 (3), 231-256.

Harvey, C. R., (2000). «The Drivers of Expected Returns in International Markets». Emerging Markets Quarterly, Fall 2000, https://www.researchgate.net/publication/2430747_The_Drivers_of_Expected_Returns_in_International_Markets

Hu, O., (2003). «Forecasting Ability of the Fama and French Three-Factor Model: Implications for Capital Budgeting». Working paper, West Virginia University.

Leite, A.L., Klotzle, M.C., Pinto, A. C. F. and da Silva, A.F. (2018). «Size, value, profitability and investment: Evidence from emerging markets». Emerging Markets Review, 36, 45-59, doi: 10.1016/j.ememar.2018.04.006

Maris, G. (2009). «Application of the Fama and French Three-Facto-Model to the Greek Stock Market». Thesis submitted in partial fulfillment of the requirements for the degree of Master of Science. University of Macedonia, Department of Accounting & Finance.

Miao, D. and Yi, X., (2013). «Empirical researches of the capital Asset Pricing model and the Fama and French three-factor model on the U.S. stock market». Bachelor Thesis in Economics, Mälardalen University.

Mobin, A., Sanjay, K. (2018). «Three-Factor Model of Asset Pricing: Empirical Evidence from the Indian Stock Market». The IUP Journal of Applied Finance, 24(3), 16-34.

Nartea, G. V., Ward, B. D., and Djajadikerta, H. G. (2009). «Size, BM, and momentum effects and the robustness of the Fama-French three-factor model: Evidence from New Zealand». International Journal of Managerial Finance, 5(2), 179-200.

Naughton A. and Veeraraghavan M. (2005). «A multifactor model explanation of the cross-section of expected stock returns: evidence from Indonesia, Singapore and Taiwan». Finance India, 19(1), 135-157.

Nguyen, A., Faff, R. and Gharghori, P. (2009). «Are the Fama-French factors proxing news related to GDP growth? The Australian evidence». Review of Quantitative Finance & Accounting, 33(2), 141-158. doi: 10.1007/s11156-009-0137-8

Pasaribu, R. B., (2009). «Stock Portfolio with Fama-French Model in Indonesian Stock Exchange». Journal of Accounting and Business, 9 (1), 1-12.

Ragab, N. S., Ragab, K. A., and Sakr, A.M.(2020). «A Comparative Study between the Fama and French Three-Factor Model and the Fama and French Five-Factor Model: Evidence from the Egyptian Stock Market». International Journal of Economics and Finance, 12(1), 52-69.

Shah, S. H. A., Shah, A., Khan, M. K. and Hamidullah. (2021). «The Risk and Return Relations: New Evidence from Pakistani Stock Market». Journal of Accounting and Finance in Emerging Economics, 7(1), 195-204.

Sharpe, W.F. (1963). «A Simplified Model for Portfolio Analysis». Management Science, 9(2), 277–293.

Sharpe, W.F. (1964). «Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk». Journal of Finance, 19(3), 425-442.

Shum W.C and Tang G.Y.N. (2005). «Common risk factors in returns in Asian emerging stock markets». International Business Review, 14(6), 695-717.

Silva, A. C. D., (2006). «Modeling and Estimating a Higher Systemic Co Moment Asset Pricing Model in the Brizilian Stock Market». Latin American Business Review, 6(4), 85-101, doi: 10.1300/J140v06n04_05

Sutrisno, B., Nasri, R. (2018). «Is More Always Better? An Empirical Investigation of the CAPM and the Fama-French Three-Factor Model in Indonesia». International Conference on Economics, Business and Economic Education, 454-468. doi: 10.18502/kss.v3i10.3148

Trimech, A., Kortas, H., Benammou, S. and Benammou, S. (2009). «Multiscale Fama-French model: application to the French market». The Journal of Risk Finance, 10(2), 179-192.

Zaremba, A., Konieczka, P. (2017). «Size, Value, and Momentum in Polish Equity Returns : Local or International Factors ?». International Journal of Management and Economics, 53(3), 26-47.

Zaremba, A., Czapkiewicz, A., Szczygielski, J.J. and Kaganov, V. (2019). «An Application of Factor Pricing Models to the Polish stock Market». Emerging markets Finance & Trade, 38, 219-238. doi : 10.1080/1540496X.2018.1517042

Downloads

Published

2023-12-30

How to Cite

ALAOUI TAIB, A., & BENFEDDOUL, S. (2023). Explaining the time series of stock returns: comparative study on the Moroccan market . Journal of Academic Finance, 14(2), 2–16. https://doi.org/10.59051/joaf.v14i2.634

Issue

Vol. 14 No. 2 (2023): Fall 2023

Section

Articles

License

Copyright (c) 2023 Asmâa Alaoui Taib, Safae Benfeddoul

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Authors who publish with this journal agree to the following terms:

    1. Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
    2. Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
    3. Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access).