An Analysis and Comparison of Multi-Factor Asset Pricing Model Performance during Pandemic Situations in Developed and Emerging Markets

Abstract

This study empirically analyzes and compares return data from developed and emerging market data based on the Fama French five-factor model and compares it to previous results from the Fama French three-factor model by Kostin, Runge and Adams (2021). It researches whether the addition of the profitability and investment pattern factors show superior results in the assessment of emerging markets during the COVID-19 pandemic compared to developed markets. We use panel data covering eight indices of developed and emerging countries as well as a selection of eight companies from these markets, covering a period from 2000 to 2020. Our findings suggest that emerging markets do not generally outperform developed markets. The results underscore the need to reconsider the assumption that adding more factors to regression models automatically yields results that are more reliable. Our study contributes to the extant literature by broadening this research area. It is the first study to compare the performance of the Fama French three-factor model and the Fama French five-factor model in the cost of equity calculation for developed and emerging countries during the COVID-19 pandemic and other crisis events of the past two decades.

Using the Capital Asset Pricing Model and the Fama–French Three-Factor and Five-Factor Models to Manage Stock and Bond Portfolios: Evidence from Timor-Leste

“…It is interesting to compare these results with those of Kostin et al (2022) on multifactor asset pricing and factor models during pandemic situations in developed and emerging markets. Timor-Leste is one of the new/emerging markets that invest their assets in the form of stocks and bonds in the markets of developed countries such as the United States (US), the United Kingdom (UK), Japan, and Germany.…”

The value premium in the Vietnamese equity market

“…Leite et al (2018) reaffirmed the presence of the value premium in 12 emerging markets from 2007 to 2017 with significant and positive returns of the value minus growth portfolios. Kostin et al (2022) reported monthly value premiums in China and Brazil during the 2000-2020 period at 0.27% and 0.24%, respectively. The Moroccan Stock Exchange's value minus growth portfolio yielded a significantly positive return of approximately 0.8% per month (Taib and Benfeddoul, 2023).…”

“…Hanauer and Linhart (2015) and Leite et al (2018) looked at emerging markets and ascertained the value premium in the Latin American, Eastern European, and Asia-Pacific markets. The value premium haas also been uncovered in China and Brazil (Kostin et al, 2022), andMorocco (Taib andBenfeddoul, 2023).…”

The impact of IFRS 9 on the cyclicality of loan loss provisions

“…During the first quarter of 2020, the COVID‐19 virus, first detected in Wuhan, China, spread rapidly worldwide. In light of this global pandemic, supply chains were disrupted, countries‐imposed lockdowns of varying severity, and prevailing uncertainty tremendously impacted the economy (Kostin et al., 2022; Wiedra et al., 2022). Following Neisen and Schulte‐Mattler (2021), the extent to which the pandemic influenced the economy is still not completely clear, as both the real economy and the financial world were affected.…”