Application of asset pricing models: evidence from Saudi exchange

  • Received October 8, 2019;
    Accepted March 11, 2020;
    Published April 6, 2020
  • Author(s)
  • DOI
    http://dx.doi.org/10.21511/imfi.17(1).2020.29
  • Article Info
    Volume 17 2020, Issue #1, pp. 348-368
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The Saudi Arabia Stock Exchange (Tadawul) is one of the biggest emerging Stock Exchanges in the Middle East region. Therefore, this research aims to apply Fama and French (2015) 5-factor model on Tadawul, and compares it with the Fama and French 3-factor model and CAPM to check the applicability of the models in Tadawul and the identity of the factors that can affect stock returns. Furthermore, the Generalized Method of Moments (GMM) regression has been implemented to examine the impact between the variables in the models. Empirically, the results show that Fama and French (2015) 5-factor model is the most consistent model in comparison to the other two models in terms of explaining the cross-section of average stock returns in Tadawul. However, it is not the best according to the intercepts results of all the regressions in 2x3, 2x2, or 2x2x2x2 sorts. Besides, Fama and French (2015) 5-factor model has the highest explanatory power in most of the portfolios based on the adjusted R2 regardless of the sort (2x3, 2x2, or 2x2x2x2). Finally, the results conclude that Fama and French (2015) 5-factor model can be an applicable model in Tadawul but only market and size can affect the stock returns, while the value, profitability, and investment cannot. Accordingly, the author recommends that, as a continuation of this research, further research can be done, which investigates a model with additional factors like momentum and illiquidity.

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    • Table A1. Descriptive statistics
    • Table B1. Correlations for 2x2 sort
    • Table B2. Correlations for 2x2x2x2 sort
    • Table B3. Correlations for 2x3 sort
    • Table C1. Intercepts: 2x3 factors sort on Size and B/M, Size and OP, Size and Inv
    • Table D1. Coefficients: 2x3 factors sort on Size and B/M, Size and OP, Size and Inv
    • Table E1. Intercepts: 2x2 factors sort on Size and B/M, Size and OP, Size and Inv
    • Table F1. Coefficients: 2x2 factors sort on Size and B/M, Size and OP, Size and Inv
    • Table G1. Intercepts: 2x2x2x2 factors sort on Size, B/M, OP, Inv
    • Table H1. Coefficients: 2x2x2x2 factors sort on Size, B/M, OP, Inv