Testing the new Fama and French factors with illiquidity: A panel data investigation

Racicot, François-Éric; Rentz, William F.; Théoret, Raymond

doi:10.3917/fina.393.0045

Cited by 21 publications

(17 citation statements)

References 79 publications

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“…On the other hand [ 34 ], use a distance instrument-based algorithm into a GMM framework, to study the impact of illiquidity on the returns of twelve sector portfolios. Consistently with [ 32 , 33 ], the authors conclude that the only relevant factor according to their dynamic GMM approach is the market risk premium.…”

Section: Data and Resultssupporting

confidence: 68%

“…247–251) explains that, under certain conditions, the Fama-MacBeth procedure is numerically equivalent to a pooled regression, and emphasizes the benefits of mapping this approach into the generalized method of moments (GMM), developed by [ 65 ]. Notably [ 66 ], introduces a GMM estimator that relies on distance instruments to estimate panel data regression models containing errors in variables [ 32 , 33 ]. use this approach to test the Fama-French five-factor model augmented with illiquidity measures, concluding that, in general, the most significant factor is RMRF, with measurement errors largely determining this result.…”

Section: Data and Resultsmentioning

confidence: 99%

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Impact of consumer confidence on the expected returns of the Tokyo Stock Exchange: A comparative analysis of consumption and production-based asset pricing models

Rojo-Suárez

Alonso‐Conde

2020

PLoS ONE

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Most single-factor and multifactor asset pricing models constitute special cases of the consumption-based asset pricing theory, in which investors’ marginal utility is the key determinant of asset prices. However, in recent years, production-based asset pricing models have been extraordinarily successful in correctly pricing a wide range of anomaly portfolios that are typically mispriced in previous research. In parallel, research on conditioning information has contributed to significantly improve the performance of classic consumption-based asset pricing models. On this basis, in this paper we conduct an in-depth research on the performance of consumption and production-based asset pricing models on the Tokyo Stock Exchange, for the period from 1992 to 2018, in order to test to what extent consumer confidence helps consumption models to correctly capture shifts in the investment opportunity set of investors. To overcome the constraints imposed by the periodicity of macroeconomic data, we use a factor-mimicking portfolio approach that allows us to test the performance of the models into consideration at different frequencies. Our results suggest that the consumer confidence index for Japan helps consumption-based asset pricing models outperform production-based models for different anomaly portfolios. Conversely, in those cases where consumption models perform worse, the production models also perform poorly. These results help to partially reconcile the results provided by the consumption and production models, and constitute a step forward for the purpose of identifying the fundamental risk factors that drive asset prices.

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Section: Data and Resultssupporting

confidence: 68%

Section: Data and Resultsmentioning

confidence: 99%

Impact of consumer confidence on the expected returns of the Tokyo Stock Exchange: A comparative analysis of consumption and production-based asset pricing models

Rojo-Suárez

Alonso‐Conde

2020

PLoS ONE

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“…For this sector, an increase in IML leads to a decrease in its stock return. Note that this reaction may be due to an expectation effect, an increase in illiquidity resulting in a further expected deterioration of this market dimension, giving rise to a drop in returns (see [54] and references therein). Since the return of the Health sector does not incorporate an illiquidity premium, it does not deleverage after a rise in the term spread.…”

Section: Resultsmentioning

confidence: 99%

“…Our contribution is therefore to further develop the methodology discussed in [41] and in the context of our time-varying model of risk exposures. The methodology developed in [41,54] is static. The algorithm discussed in these previous works is therefore extended to the time-varying application developed in this article.…”

Section: Robust IV Estimation Algorithm Of the Augmented Fama-french mentioning

confidence: 99%

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The conditional Fama-French model and endogenous illiquidity: A robust instrumental variables test

et al. 2019

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We investigate conditional specifications of the five-factor Fama-French (FF) model, augmented with traditional illiquidity measures. The motivation for this time-varying methodology is that the traditional static approach of the FF model may be misspecified, especially for the endogenous illiquidity measures. We focus on the time-varying nature of the Jensen performance measure α and the market systematic risk sensitivity β, as these parameters are essentially universal in asset pricing models. To tackle endogeneity and other specification errors, we rely on our robust instrumental variables (RIV) algorithm implemented via a GMM approach. In this dynamic or time-varying conditional context, we generally find that the most significant factor is the market one, but illiquidity may matter depending on which states or estimation methods we consider. In particular, sectors whose returns embed a market illiquidity premium are more exposed to a binding funding constraint in times of crisis, which leads to deleveraging and a resulting decrease in systematic risk.

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Is illiquidity priced in an international factor pricing model? A dynamic panel data application with robust IV

Racicot,

Rentz,

Théoret

2023

Int. J Fin Econ

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In the setting of a dynamic panel data framework, we investigate the international five‐factor Fama–French (2017) model augmented with traditional illiquidity factors (Amihud, Journal of Financial Markets, 2002, 5, 31–56; Amihud, Critical Finance Review, 2019, 8, 203–221; Pástor and Stambaugh, Journal of Political Economy, 2003, 111, 642–685; Pástor and Stambaugh, Critical Finance Review, 2019, 8, 277–299) to determine if any of these factors are priced. Since illiquidity measures are endogenous, we propose an algorithm that generates robust instruments which are combined with a GMM estimator to cope with both the endogeneity issues surrounding illiquidity and other eventual specification errors. In this dynamic framework, we generally find that the most significant factors correspond to market and size but illiquidity may matter depending on the level of the beta. We find that illiquidity has more impact on returns in expansion than in recession. However, the bid‐ask spread seems to behave differently from the other illiquidity measures.

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Testing the new Fama and French factors with illiquidity: A panel data investigation

Cited by 21 publications

References 79 publications

Impact of consumer confidence on the expected returns of the Tokyo Stock Exchange: A comparative analysis of consumption and production-based asset pricing models

Impact of consumer confidence on the expected returns of the Tokyo Stock Exchange: A comparative analysis of consumption and production-based asset pricing models

The conditional Fama-French model and endogenous illiquidity: A robust instrumental variables test

Is illiquidity priced in an international factor pricing model? A dynamic panel data application with robust IV

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