Is idiosyncratic risk ignored in asset pricing: Sri Lankan evidence?

Maiti, Moinak

doi:10.1186/s43093-019-0004-6

Cited by 11 publications

(9 citation statements)

References 43 publications

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“…Firstly, according to Banz (1981), “smaller firms have higher risk‐adjusted returns than bigger ones.” Thereafter considerable amount of study (Balakrishnan and Maiti (2017); Maiti (2018); Maiti and Balakrishnan (2018); Maiti (2019a, 2019b); Maiti (2020a, 2020b); Maiti and Balakrishnan (2020) and others) confirm the same and found size of the company is very important determinant factor. Then another related point is that, since smaller companies are less transparent and rarely highlighted in news, the difference in awareness between ordinary investors and analytic agencies is likely to increase (Murg et al, 2014).…”

Section: Methodology and Datamentioning

confidence: 70%

Sell‐side analysts' recommendations a value or noise

Vuković

Ugolnikov²,

Maiti

2020

Int. J Fin Econ

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The main objective of the paper is to investigate the analysts’ recommendations’ value and to determine on which market the analysts have more predictive power that can be defined as an extent of a stock price’s reaction around a particular recommendation what leads to abnormal returns of the security. Such recommendations are significant in decision‐making whether to buy or to sell a particular stock. We observed 1,881 events from 168 companies traded at the London Stock Exchange and the New York Stock Exchange in a period between January 1, 2016, and April 31, 2019. We used an event study analysis and classical one‐factor market model to determine expected returns for a particular stock in an estimation window. It was found that both American and European Union markets are feasible to be outperformed by the analysts but it is impossible to highlight any of the markets as they behave almost identically around positive, neutral and negative recommendations.

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Section: Methodology and Datamentioning

confidence: 70%

Sell‐side analysts' recommendations a value or noise

Vuković

Ugolnikov²,

Maiti

2020

Int. J Fin Econ

Self Cite

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“…Interestingly, Maiti (2019) and Perera & Ediriwickrama (2020) highlight the presence of idiosyncratic volatility in the CSE.…”

Section: Literature Reviewmentioning

confidence: 99%

“…After incorporating an idiosyncratic volatility factor, Maiti (2019) notes that the three-factor model better explains the average stock returns in the CSE. 1 However, Merton (1987) highlights that the asset pricing models are incapable of explaining the stock returns in the presence of idiosyncratic volatility.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Accordingly, on the empirical grounds, the relative success of the asset pricing models such as the CAPM and its extensions are tested in different markets (Fama & French, 2012;Fama & French, 2015;Abeysekera & Nimal, 2016;Fama & French, 2017;Abeysekera & Nimal, 2017). Moreover, Maiti (2019) tests the presence of idiosyncratic volatility in the Sri Lankan context while adding an idiosyncratic volatility factor to the three-factor model of Fama and French (1993) to show its explanation power on stock returns. So far, in the Sri Lankan context, there is a dearth of empirical evidence on the explanatory power of the five-factor model of Fama and French (2015) in the presence of idiosyncratic volatility.…”

Section: Introductionmentioning

confidence: 99%

“…Because idiosyncratic volatility does matter in the Sri Lankan context (Maiti, 2019;Perera & Ediriwickrama, 2020;Perera & Ediriwickrama, 2021), it is essential to examine the success of the five-factor model of Fama and French (2015). Further, among other factors, Malagon, Moreno, and Rodriguez (2015) note that firms' profitability and investment decisions significantly affect the idiosyncratic volatility of stocks.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

The five-factor model, stock returns and idiosyncratic volatility: evidence from Sri Lanka

Perera

2022

Int. J. Acct. Bus. Fin.

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Traditionally, the success of asset pricing models is assessed in the absence of idiosyncratic volatility, as it is believed that the role of idiosyncratic volatility is irrelevant. Nevertheless, the existing literature shows that idiosyncratic volatility matters in asset pricing decisions. Hence, this study aims to test the performance of the five-factor asset pricing model of Fama and French (2015) in the presence of idiosyncratic volatility. This study utilizes a sample of 214 companies listed on the Colombo Stock Exchange (CSE) except for those listed under the banks, finance, and insurance sectors over 163 months from September 2004 to March 2018. Nelson's (1991) Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) models are used to estimate the idiosyncratic volatility of individual stocks. The empirical findings of the study confirm that the five-factor asset pricing model of Fama and French (2015) is less successful and failed to explain the stock returns in the presence of unsystematic risk in the Sri Lankan context. This finding yields striking evidence of the success of the five-factor asset pricing model in the presence of idiosyncratic volatility while it casts doubts on the applicability of such factor models in estimating the cost of equity of firms in the real world. Although the impact of idiosyncratic volatility on stock returns is well-researched in the finance literature, there is little structured research on how idiosyncratic volatility affects the performance of asset pricing models in the Sri Lankan context. This study fills this gap by investigating the performance of the fivefactor asset pricing model of Fama and French (2015) using the firms listed on the CSE. The research findings should help academia develop more pronounced asset pricing models while tackling the idiosyncratic volatility of stocks.

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Introduction to Asset Pricing Factor Models

Maiti

2021

Applied Financial Econometrics

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Is idiosyncratic risk ignored in asset pricing: Sri Lankan evidence?

Cited by 11 publications

References 43 publications

Sell‐side analysts' recommendations a value or noise

Sell‐side analysts' recommendations a value or noise

The five-factor model, stock returns and idiosyncratic volatility: evidence from Sri Lanka

Introduction to Asset Pricing Factor Models

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