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THE RELATIONSHIP OF FINANCIAL FACTORS IN ASSET PRICING: THE CASE OF INDONESIAN MARKET
Corresponding Author(s) : Sinta Aryani
Humanities & Social Sciences Reviews,
Vol. 7 No. 5 (2019): September
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.
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- Aharoni, G., Grundy, B., & Zeng, Q. (2013). Stock returns and the Miller Modigliani valuation formula: Revisiting the Fama French analysis. Journal of Financial Economics, 110(2), 347–357. https://doi.org/10.1016/j.jfineco.2013.08.003 DOI: https://doi.org/10.1016/j.jfineco.2013.08.003
- Balakrishnan, A. (2016). Size, Value, and Momentum Effects in Stock Returns: Evidence from India. Vision: The Journal of Business Perspective, 20(1), 1–8. https://doi.org/10.1177/0972262916628929 DOI: https://doi.org/10.1177/0972262916628929
- Banz, R. W. (1981). The relationship between return and market value of common stocks. Journal of Financial Economics, 9(1), 3–18. https://doi.org/10.1016/0304-405X(81)90018-0 DOI: https://doi.org/10.1016/0304-405X(81)90018-0
- Basu, S. (1983). The relationship between earnings’ yield, market value and return for NYSE common stocks. Further evidence. Journal of Financial Economics, 12(1), 129–156. https://doi.org/10.1016/0304-405X(83)90031-4 DOI: https://doi.org/10.1016/0304-405X(83)90031-4
- Bergbrant, M. C., & Kelly, P. J. (2016). Macroeconomic Expectations and the Size, Value, and Momentum Factors. Financial Management, 45(4), 809–844. https://doi.org/10.1111/fima.12140 DOI: https://doi.org/10.1111/fima.12140
- Bhandari, L. C. (1988). Debt/Equity Ratio and Expected Common Stock Returns : Empirical Evidence. The Journal of Finance, 43(2), 507–528. https://doi.org/10.1111/j.1540-6261.1988.tb03952.x DOI: https://doi.org/10.1111/j.1540-6261.1988.tb03952.x
- Bicer, B. (2006). Stock valuation for Investment and corporate decisions. ProQuest Dissertations and Theses, (Stock Valuation), 136–136 p.
- Bornholt, G., & Malin, M. (2014). Strong and Weak Momentum Components : Evidence From International Market Indices. The Finsia Journal of Applied Finance, (2), 11–16. https://doi.org/10.2139/ssrn.2315993 DOI: https://doi.org/10.2139/ssrn.2315993
- Carhart, M. (1997). On Persistence in Mutual Fund Performance.pdf. Journal of Finance, 52(1), 57–82. https://doi.org/10.1111/j.1540-6261.1997.tb03808.x DOI: https://doi.org/10.1111/j.1540-6261.1997.tb03808.x
- Chan, L. K. C., Hamao, Y., & Lakonishok, J. (1991). Fundamentals and Stock Returns in. The Journal of Finance, 46(5), 1739–1764. https://doi.org/10.1111/j.1540-6261.1991.tb04642.x DOI: https://doi.org/10.1111/j.1540-6261.1991.tb04642.x
- Chan, L. K. C., Jegadeesh, N., & Lakonishok, J. (1996). Momentum Strategies. The Journal of Finance, 51(5). https://doi.org/10.1111/j.1540-6261.1996.tb05222.x DOI: https://doi.org/10.1111/j.1540-6261.1996.tb05222.x
- Fama, E. F., & French, K. R. (1992). The Cross-Section of Expected Stock Returns. The Journal of Finance, XLVII(2), 427–465. https://doi.org/10.1111/j.1540-6261.1992.tb04398.x DOI: https://doi.org/10.1111/j.1540-6261.1992.tb04398.x
- Fama, E. F., & French, K. R. (2012). Size, Value, and Momentum in International Stock Returns. https://doi.org/10.2139/ssrn.1720139 DOI: https://doi.org/10.2139/ssrn.1720139
- Fama, E. F., & French, K. R. (2015). A five-factor asset pricing model. Journal of Financial Economics, 116(1), 1–22. https://doi.org/10.1016/j.jfineco.2014.10.010 DOI: https://doi.org/10.1016/j.jfineco.2014.10.010
- Fletcher, J. (2017). Exploring the benefits of using stock characteristics in optimal portfolio strategies. European Journal of Finance, 23(3), 192–210. https://doi.org/10.1080/1351847X.2015.1062036 DOI: https://doi.org/10.1080/1351847X.2015.1062036
- Foye, J., Mramor, D., & Pahor, M. (2013). A Respecified Fama French Three-Factor Model for the New European Union Member States. Journal of International Financial Management and Accounting, 24(1), 3–25. https://doi.org/10.1111/jifm.12005 DOI: https://doi.org/10.1111/jifm.12005
- Frazzini, A., & Pedersen, L. H. (2014). Betting against beta. Journal of Financial Economics, 111(1), 1–25. https://doi.org/10.1016/j.jfineco.2013.10.005 DOI: https://doi.org/10.1016/j.jfineco.2013.10.005
- Indonesia Economic Quarterly: Learning more, growing faster. (2018).
- Jegadeesh, N., & Titman, S. (1993). Returns to Buying Winners and Selling Losers : Implications for Stock Market Efficiency. The Journal of Finance, 48(1), 65–91. https://doi.org/10.1111/j.1540-6261.1993.tb04702.x DOI: https://doi.org/10.1111/j.1540-6261.1993.tb04702.x
- Kaplan, S. N., & Ruback, R. S. (1995). The valuation of cash flow forecasts: an emprical analysis, L(4), 1059–1093. https://doi.org/10.1111/j.1540-6261.1995.tb04050.x DOI: https://doi.org/10.1111/j.1540-6261.1995.tb04050.x
- Lakonishok, J., & Shapiro, A. C. (1986). Systematic risk, total risk and Size as determinants of stock market returns. Journal of Banking and Finance, 10(1), 115–132. https://doi.org/10.1016/0378-4266(86)90023-3 DOI: https://doi.org/10.1016/0378-4266(86)90023-3
- Narayan, P. K., & Phan, D. H. B. (2016). Momentum strategies for Islamic stocks. Pacific-Basin Finance Journal, (August). https://doi.org/10.1016/j.pacfin.2016.05.015 DOI: https://doi.org/10.1016/j.pacfin.2016.05.015
- Novy-Marx, R. (2013). The other side of value: The gross profitability premium. Journal of Financial Economics, 108(1), 1–28. https://doi.org/10.1016/j.jfineco.2013.01.003 DOI: https://doi.org/10.1016/j.jfineco.2013.01.003
- Pyo, U. H. (2013). Momentum profits and idiosyncratic volatility : the Korean evidence, 180–200. https://doi.org/10.1108/14757701311327722 DOI: https://doi.org/10.1108/14757701311327722
- Rosenberg, B., Kenneth Reid, & Lanstein, R. (1985). Persuasive evidence of market inefficiency PROPERTIES OF THE STRATEGIES. The Journal of Portfolio Management, 113, 9–16. https://doi.org/10.3905/jpm.1985.409007 DOI: https://doi.org/10.3905/jpm.1985.409007
- Rosenberg, B., Reid, K., & Lanstein, R. (2009). Persuasive evidence of market inefficiency. The Journal of Portfolio Management, 11(3), 9–16. https://doi.org/10.3905/jpm.1985.409007 DOI: https://doi.org/10.3905/jpm.1985.409007
- Ross, S. A. (1976). The Arbitrage Theory of Capital Asset Pricing, 341–360. https://doi.org/10.1016/0022-0531(76)90046-6 DOI: https://doi.org/10.1016/0022-0531(76)90046-6
- Sharpe, W. F. (1964). The Journal of Finance. The Journal of Finance, 19(3), 425–442. Retrieved from http://efinance.org.cn/cn/fm/Capital Asset Prices A Theory of Market Equilibrium under Conditions of Risk.pdf. https://doi.org/10.1111/j.1540-6261.1964.tb02865.x DOI: https://doi.org/10.1111/j.1540-6261.1964.tb02865.x
- Sutrisno, B., & Ekaputra, I. (2016). Uji Empiris Model Asset Pricing Lima Faktor Fama-French di Indonesia FAMA-FRENCH DI INDONESIA. Jurnal Keuangan Dan Perbakan, 20(September 2016), 343–357. https://doi.org/10.26905/jkdp.v20i3.287 DOI: https://doi.org/10.26905/jkdp.v20i3.287
- Zaremba, A., & Konieczka, P. (2014). Illusionary Value, Size and Momentum Premiums in the CEE Markets. SSRN Electronic Journal, 65(1), 84–105. https://doi.org/10.2139/ssrn.2375454 DOI: https://doi.org/10.2139/ssrn.2375454
- Zarina, M. N. (2011). Asset pricing and macro factors in ASEAN5. 2011 IEEE Colloquium on Humanities, Science and Engineering, CHUSER 2011, (Chuser), 592–596. https://doi.org/10.1109/CHUSER.2011.6163801 DOI: https://doi.org/10.1109/CHUSER.2011.6163801
References
Aharoni, G., Grundy, B., & Zeng, Q. (2013). Stock returns and the Miller Modigliani valuation formula: Revisiting the Fama French analysis. Journal of Financial Economics, 110(2), 347–357. https://doi.org/10.1016/j.jfineco.2013.08.003 DOI: https://doi.org/10.1016/j.jfineco.2013.08.003
Balakrishnan, A. (2016). Size, Value, and Momentum Effects in Stock Returns: Evidence from India. Vision: The Journal of Business Perspective, 20(1), 1–8. https://doi.org/10.1177/0972262916628929 DOI: https://doi.org/10.1177/0972262916628929
Banz, R. W. (1981). The relationship between return and market value of common stocks. Journal of Financial Economics, 9(1), 3–18. https://doi.org/10.1016/0304-405X(81)90018-0 DOI: https://doi.org/10.1016/0304-405X(81)90018-0
Basu, S. (1983). The relationship between earnings’ yield, market value and return for NYSE common stocks. Further evidence. Journal of Financial Economics, 12(1), 129–156. https://doi.org/10.1016/0304-405X(83)90031-4 DOI: https://doi.org/10.1016/0304-405X(83)90031-4
Bergbrant, M. C., & Kelly, P. J. (2016). Macroeconomic Expectations and the Size, Value, and Momentum Factors. Financial Management, 45(4), 809–844. https://doi.org/10.1111/fima.12140 DOI: https://doi.org/10.1111/fima.12140
Bhandari, L. C. (1988). Debt/Equity Ratio and Expected Common Stock Returns : Empirical Evidence. The Journal of Finance, 43(2), 507–528. https://doi.org/10.1111/j.1540-6261.1988.tb03952.x DOI: https://doi.org/10.1111/j.1540-6261.1988.tb03952.x
Bicer, B. (2006). Stock valuation for Investment and corporate decisions. ProQuest Dissertations and Theses, (Stock Valuation), 136–136 p.
Bornholt, G., & Malin, M. (2014). Strong and Weak Momentum Components : Evidence From International Market Indices. The Finsia Journal of Applied Finance, (2), 11–16. https://doi.org/10.2139/ssrn.2315993 DOI: https://doi.org/10.2139/ssrn.2315993
Carhart, M. (1997). On Persistence in Mutual Fund Performance.pdf. Journal of Finance, 52(1), 57–82. https://doi.org/10.1111/j.1540-6261.1997.tb03808.x DOI: https://doi.org/10.1111/j.1540-6261.1997.tb03808.x
Chan, L. K. C., Hamao, Y., & Lakonishok, J. (1991). Fundamentals and Stock Returns in. The Journal of Finance, 46(5), 1739–1764. https://doi.org/10.1111/j.1540-6261.1991.tb04642.x DOI: https://doi.org/10.1111/j.1540-6261.1991.tb04642.x
Chan, L. K. C., Jegadeesh, N., & Lakonishok, J. (1996). Momentum Strategies. The Journal of Finance, 51(5). https://doi.org/10.1111/j.1540-6261.1996.tb05222.x DOI: https://doi.org/10.1111/j.1540-6261.1996.tb05222.x
Fama, E. F., & French, K. R. (1992). The Cross-Section of Expected Stock Returns. The Journal of Finance, XLVII(2), 427–465. https://doi.org/10.1111/j.1540-6261.1992.tb04398.x DOI: https://doi.org/10.1111/j.1540-6261.1992.tb04398.x
Fama, E. F., & French, K. R. (2012). Size, Value, and Momentum in International Stock Returns. https://doi.org/10.2139/ssrn.1720139 DOI: https://doi.org/10.2139/ssrn.1720139
Fama, E. F., & French, K. R. (2015). A five-factor asset pricing model. Journal of Financial Economics, 116(1), 1–22. https://doi.org/10.1016/j.jfineco.2014.10.010 DOI: https://doi.org/10.1016/j.jfineco.2014.10.010
Fletcher, J. (2017). Exploring the benefits of using stock characteristics in optimal portfolio strategies. European Journal of Finance, 23(3), 192–210. https://doi.org/10.1080/1351847X.2015.1062036 DOI: https://doi.org/10.1080/1351847X.2015.1062036
Foye, J., Mramor, D., & Pahor, M. (2013). A Respecified Fama French Three-Factor Model for the New European Union Member States. Journal of International Financial Management and Accounting, 24(1), 3–25. https://doi.org/10.1111/jifm.12005 DOI: https://doi.org/10.1111/jifm.12005
Frazzini, A., & Pedersen, L. H. (2014). Betting against beta. Journal of Financial Economics, 111(1), 1–25. https://doi.org/10.1016/j.jfineco.2013.10.005 DOI: https://doi.org/10.1016/j.jfineco.2013.10.005
Indonesia Economic Quarterly: Learning more, growing faster. (2018).
Jegadeesh, N., & Titman, S. (1993). Returns to Buying Winners and Selling Losers : Implications for Stock Market Efficiency. The Journal of Finance, 48(1), 65–91. https://doi.org/10.1111/j.1540-6261.1993.tb04702.x DOI: https://doi.org/10.1111/j.1540-6261.1993.tb04702.x
Kaplan, S. N., & Ruback, R. S. (1995). The valuation of cash flow forecasts: an emprical analysis, L(4), 1059–1093. https://doi.org/10.1111/j.1540-6261.1995.tb04050.x DOI: https://doi.org/10.1111/j.1540-6261.1995.tb04050.x
Lakonishok, J., & Shapiro, A. C. (1986). Systematic risk, total risk and Size as determinants of stock market returns. Journal of Banking and Finance, 10(1), 115–132. https://doi.org/10.1016/0378-4266(86)90023-3 DOI: https://doi.org/10.1016/0378-4266(86)90023-3
Narayan, P. K., & Phan, D. H. B. (2016). Momentum strategies for Islamic stocks. Pacific-Basin Finance Journal, (August). https://doi.org/10.1016/j.pacfin.2016.05.015 DOI: https://doi.org/10.1016/j.pacfin.2016.05.015
Novy-Marx, R. (2013). The other side of value: The gross profitability premium. Journal of Financial Economics, 108(1), 1–28. https://doi.org/10.1016/j.jfineco.2013.01.003 DOI: https://doi.org/10.1016/j.jfineco.2013.01.003
Pyo, U. H. (2013). Momentum profits and idiosyncratic volatility : the Korean evidence, 180–200. https://doi.org/10.1108/14757701311327722 DOI: https://doi.org/10.1108/14757701311327722
Rosenberg, B., Kenneth Reid, & Lanstein, R. (1985). Persuasive evidence of market inefficiency PROPERTIES OF THE STRATEGIES. The Journal of Portfolio Management, 113, 9–16. https://doi.org/10.3905/jpm.1985.409007 DOI: https://doi.org/10.3905/jpm.1985.409007
Rosenberg, B., Reid, K., & Lanstein, R. (2009). Persuasive evidence of market inefficiency. The Journal of Portfolio Management, 11(3), 9–16. https://doi.org/10.3905/jpm.1985.409007 DOI: https://doi.org/10.3905/jpm.1985.409007
Ross, S. A. (1976). The Arbitrage Theory of Capital Asset Pricing, 341–360. https://doi.org/10.1016/0022-0531(76)90046-6 DOI: https://doi.org/10.1016/0022-0531(76)90046-6
Sharpe, W. F. (1964). The Journal of Finance. The Journal of Finance, 19(3), 425–442. Retrieved from http://efinance.org.cn/cn/fm/Capital Asset Prices A Theory of Market Equilibrium under Conditions of Risk.pdf. https://doi.org/10.1111/j.1540-6261.1964.tb02865.x DOI: https://doi.org/10.1111/j.1540-6261.1964.tb02865.x
Sutrisno, B., & Ekaputra, I. (2016). Uji Empiris Model Asset Pricing Lima Faktor Fama-French di Indonesia FAMA-FRENCH DI INDONESIA. Jurnal Keuangan Dan Perbakan, 20(September 2016), 343–357. https://doi.org/10.26905/jkdp.v20i3.287 DOI: https://doi.org/10.26905/jkdp.v20i3.287
Zaremba, A., & Konieczka, P. (2014). Illusionary Value, Size and Momentum Premiums in the CEE Markets. SSRN Electronic Journal, 65(1), 84–105. https://doi.org/10.2139/ssrn.2375454 DOI: https://doi.org/10.2139/ssrn.2375454
Zarina, M. N. (2011). Asset pricing and macro factors in ASEAN5. 2011 IEEE Colloquium on Humanities, Science and Engineering, CHUSER 2011, (Chuser), 592–596. https://doi.org/10.1109/CHUSER.2011.6163801 DOI: https://doi.org/10.1109/CHUSER.2011.6163801