An Examination of Pricing Anomalies for Australian Stocks

Rohit Kishore, Shalendra S. Kumar, ShiGuo Xu

Abstract

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. 


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References


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