An Examination of Pricing Anomalies for Australian Stocks

Rohit Kishore, Shalendra S. Kumar, ShiGuo Xu


The beta coefficient of the capital asset pricing model (CAPM) has been a widely used single factor for determining the returns on risky assets, e.g., company stocks. The other attributing factors are deemed anomalies and assumed to only exist temporarily and not considered as fundamental factors in the determination of returns on risky assets. The purpose of this study is to examine the details of two other pricing factors, in addition to the CAPM beta, in the return characteristics for the Australian stock market. These two factors are the different sizes of firms (SMB) and the ratios between their book values and market values (HML). The study period is from 1st January 2000 through 31st December 2017. The SMB and HML factors are calculated using scientific methodology, which makes a considerable contribution to the Australian stock market literature. The findings suggest that the regression coefficients of both SMB and HML factors are statistically more significant than the beta coefficients. Furthermore, the SMB and HML coefficients co-vary consistently with the returns on most stocks and can explain the residual returns left by the CAPM beta. These findings confirm the presence of SMB and HML effects in the Australian stock market returns, in addition to the CAPM beta returns, and can confirm similar findings for other developed stock markets, e.g., USA, UK. 



Keywords: pricing anomalies, capital asset pricing model, Fama-French three-factor model, book value, market value, firm size effect. 

Full Text:



SHARPE W. F. Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. Journal of Finance, 1964, 19(3): 425-442.

LINTNER J. Security Prices, Risk, And Maximal Gains From Diversification. Journal of Finance, 1965, 20(4): 587-615.

BASU S. The relationship between earnings' yield, market value and return for NYSE common stocks: Further evidence. Journal of Financial Economics, 1983, 12(1): 129-156.

BANZ R. W. The relationship between return and market value of common stocks. Journal of Financial Economics, 1981, 9(1): 3-18.

REINGANUM M. R. Misspecification of capital asset pricing: Empirical anomalies based on earnings' yields and market values. Journal of Financial Economics, 1981, 9(1): 19-46.

FAMA E. F., & FRENCH K. R. Multifactor explanations of asset pricing anomalies. The Journal of Finance, 1996, 51(1): 55-84.

CARHART M. M. On Persistence in Mutual Fund Performance. Journal of Finance, 1997, 52(1): 57-82.

DEBONDT W. F. M., & THALER R. H. Does the Stock Market Overreact? Journal of Finance, 1985, 40(3): 793-805.

LAKONISHOK J., SHEILFER A., and VISHNY R. W. Contrarian investment, extrapolation, and risk. Journal of Finance, 1994, 49(5): 1541-1578.

JEGADEESH N., & TITMAN S. Returns to buying winners and selling losers: Implications for stock market efficiency. Journal of Finance, 1993, 48(1): 65-91.

CHAN K. C., & CHEN N. Structural and Return Characteristics of Small and Large Firms. Journal of Finance, 1991, 46: 1467-1484.

ROUWENHORST K. International Momentum Strategies. The Journal of Finance, 1998, 53(1): 267-284.

GRIFFIN J. M., JI X., and MARTIN J. S. Momentum Investing and Business Cycle Risk: Evidence from Pole to Pole. Journal of Finance, 2003, 58(6): 2515-2547.

ASNESS C. S., & FRAZZINI A. The devil in HML's details. AQR Capital Management, 2012.

FAMA E. F., & FRENCH K. R. Size, value, and momentum in international stock returns. Journal of Financial Economics, 2012, 105(3): 457–472.

HALLIWELL J., HEANEY R., and SAWICKI J. Size and book-to-market effects in Australian share markets: a time series analysis. Accounting Research Journal, 1999, 12: 122–137.

GAUNT C. Size and book-to-market effects and the Fama-French three factor asset pricing model: evidence from the Australian stockmarket. Accounting and Finance, 2004, 44: 27–44.

FAFF R. W. An examination of the Fama and French three-factor model using commercially available factors. Australian Journal of Management, 2001, 26(1): 1–17.

FAFF R. W. A simple test of the Fama and French model using daily data: Australian evidence. Applied Financial Economics, 2004, 14(2): 83–92.

GHARGHORI P., CHAN H., and FAFF R. W. Are the Fama-French factors proxying default risk. Australian Journal of Management, 2007, 32(2): 223–250.

BRAILSFORD T., GAUNT C., and O'BRIEN M. The investment value of the value premium. Pacific Basin Finance Journal, 2012, 20(3): 416-437.

FAMA E. F., & FRENCH K. R. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 1993, 33(1): 3–56.

INDRAYATI, RAHMAT B., and SLAMET. Factors Affecting Earning Response Coefficient at LQ-45 Company in Indonesia Stock Exchange. Journal of Southwest Jiaotong University, 2020, 55(5).

CHAN K. C., & CHEN N. Structural and Return Characteristics of Small and Large Firms. Journal of Finance, 1991, 46: 1739-1789.

GHARGHORI P., CHAN H., and FAFF R. W. Are the Fama-French factors proxying default risk. Australian Journal of Management, 2007, 32(2): 223–250.

AVARMOV D., CHORDIA T., and GOYAL A. The impact of trades on daily volatility. Review of Financial Studies, 2006, 19(4): 1241–1277.

LEWELLEN J., NAGEL S., and SHANKEN J. A skeptical appraisal of asset-pricing tests. Journal of Financial Economics, 2010, 96(2): 175-194.

ANNIN M. and FALASCHETTI D. Is There Still a Size Premium? Ibbotson Associates, Chicago, Illinois, 1999.

GUSTAFSON K. E., & MILLER J. D. Where has the small-stock premium gone? The Journal of Investing, 1999, 8(3): 45-53.

BAGELLA M., BECCHETTI L., and CARPENTIERI A. The first shall be last: size and value strategy premia at the London Stock Exchange. Journal of Banking and Finance, 2000, 24(6): 893–919.

FAMA E. F., & FRENCH K. R. The cross-section of expected stock returns. The Journal of Finance, 1992, 47(2): 427-465.

IBBOTSON ASSOCIATES. 1998 Yearbook: Market Results for 1926-1997. Ibbotson Associates, Chicago, Illinois, 1998.

DIEN N. T., DUC L. D. M., THUY V. H. N., and TIEN N. H. Factors Affecting Responsibility Accounting at Joint Stock Commercial Banks in Vietnam. Journal of Southwest Jiaotong University, 2020, 55(4).


  • There are currently no refbacks.