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Abstract

PurposeThe aim of this study is to investigate the role of efficiency in capital asset pricing. The paper explores the impact of a four-factor model that involves an efficiency factor on the returns of Nasdaq technology firms.Design/methodology/approachThe paper relies on data of 147 firms from July 2007 to June 2017 to examine the impact of efficiency on stock returns. The performances of the capital asset pricing model (CAPM), Fama–French three-factor model and the proposed four-factor model are evaluated based on the time series regression method. The parameters such as the GRS F-statistic and adjusted R² are used to compare the relative performances of all models.FindingsThe results show that all factors of the models are found to be valid in asset pricing. Also, the paper provides evidence that the explanatory power of the proposed four-factor model outperforms the explanatory power of the CAPM and Fama–French three-factor model.Originality/valueUnlike most asset pricing studies, this paper presents a new asset pricing model by adding the efficiency factor to the Fama–French three-factor model. It is documented that the efficiency factor increases the predictive ability of stock returns. Evidence implies that investors consider efficiency as one of the main factors in pricing their assets.

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Global investing offers investors a larger pool of investment opportunities and tremendous diversification. However, despite the increased integration of world economies, there are still important variations among overseas capital markets. Complexities of overseas investing can often ensnare even the best active asset managers. International indexing is an option to overcome the difficulties of global investing. This study considers international indexing as a means of portfolio diversification. Performances of 15 international indexes are evaluated using monthly return data from 1998 through 2002. Returns are measured against ISE-100 Index (Istanbul Stock Exchange-100 Index) returns. The results of the study suggest that international indexing does not offer superior returns compared to the ISE-100 index.