helenanaffa a multifactor approach in understanding asset pricing anomalies

8/12/2019 HelenaNaffa a Multifactor Approach in Understanding Asset Pricing Anomalies

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A Multifactor Approach in Understanding

Asset Pricing Anomalies

An empirical study of the factor model in the

Budapest Stock Market

Naffa Helena

Spring 2009

Budapest


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Table of Contents

Table of Figures...................................................................................................................3

Tables....................................................................................................................................3

1 Introduction....................................................................................................................... 5

2 The Efficient Market Hypothesis.....................................................................................6

2.1 Theory.........................................................................................................................................72!! "eak #orm of $fficiency%2!2 Semi&Strong #orm of $fficiency%2!' Strong #orm of $fficiency%

2.2 The Hypothesis Defied...................................................................................................... ........102.3 Capital Asset Pricing Model..................................................................................................... 122.4 An Alternatie Theory! Ar"itrage Pricing Theory.....................................................................14

2.# $elationship "et%een the CAPM and APT................................................................................1&2.& 'hen Theories (ail) Ano*alies Preail....................................................................................1&

2(! )he *alendar $ffect !+2(2 $arnings on Book $,uity 2!2(' P-$ $ffect222(. Smallirm $ffect222(/ 1er and Under eaction to $arnings2'2(( Mean e1ersion 2.2(+ )he Momentum $ffect 2/

2(% ther Anomalies 2+2.7 Ca+ses of the Ano*alies......................................................................................................... ..30

3 Behavioural Finance....................................................................................................... 32

4 Anomalies: Premium or Inefficiency.............................................................................33

4.1 A Test to the CAPM...................................................................................................................344.2 M+ltiple (actors .......................................................................................................................3&

.2! Market *apitalisation and the 3alue Premium'%4.3 Three (actor Model of (a*a and (rench.................................................................................404.4 Characteristics Model of Daniel and Tit*an............................................................................42

5 Empirical Findings of the Budapest Stock Exchange.................................................. 45

/!! *alculating 4eta and mean return.//!2 #orming Portfolios .9/!' )he #actors5 Market Premium6 SMB and HM7/'/!. #ama8s model tested on the Budapest Stock $change//

6 Limitations of the Study................................................................................................. 59

2


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7 Conclusion........................................................................................................................60

References.......................................................................................................................... 62

Appendix 1......................................................................................................................... 66

Appendix 2......................................................................................................................... 68

Table of Figures

Figure 1: Haugens monthly returns for years 1927-2001 .............................................18

Figure 2 Mean reverting and non-mean reverting behaviour ...................................... 24

Figure 3: CAPM mean excess returns plotted against beta. ........................................ 36

Figure 4: Empirical beta for BUX components, calculation period 1996 -2007...........47

Figure 5: Reuters beta for BUX components, calculation period 5 years.....................47

Figure 6: Empirical beta (x axis) graphed against stock return (y axis), period Sept.

2004 Sept. 2008................................................................................................................ 48

Figure 7: Reuters beta (x axis) graphed against stock return (y axis), period 5 years

from 2007............................................................................................................................ 49

Figure 8: Mean excess returns vs. market beta, varying size and book/market ratio 51

Figure 9: Varying size within book-to-market equity ratio groups. ............................52

Figure 10: Varying book-to-market equity ratio within size groups.............................52

Figure 11: BUX yearly return and the 3 month government bond yield from

February 1997 to March 2008...........................................................................................53

Figure 12: Market premium is shown by the excess return over the risk free rate.....54

Tables

Table 1: The first periods regression January 1991- December 1997 .........................19

Table 2: The second periods regression January 1998 December 2004................... 20

'


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Table 3: Summary Statistics for Monthly Percent Three-Factor Explanatory Returns

..............................................................................................................................................41

Table 4: Regression Results for the Characteristic-Balanced Portfolios ..................... 44

Table 5. Returns of the 16 BUX constituent stocks, their betas calculated using yearly

yields projected on 1 day, and their Reuters beta. Calculation period 1996 2007.. .46

Table 6: Stock returns, betas calculated using yearly yields projected on 1 day,

Reuters beta. Calculation period September 2004 Sept. 2008................................... 48

Table 7: Correlation matrix of the factors HML and SMB

..............................................................................................................................................55

Table 8: Granger causality test for the factors HML and SMB.................................... 55

Table 9: Summary table of regression of the 3 factors on the 23 Hungarian shares...58

.


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,'hat is a cynic- A *an %ho no%s the price of eerything) and the al+e of nothing./

scar "ilde : 7ady "indermere8s #an

1 Introduction

An anomaly is usually a disorder6 a de1iation from the norm ;n natural science6 it has

induced researchers to formulate ne< theories ;n finance ho


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2000 p '.'@ Get his


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2.1.1 Weak For of Efficiency

;n its


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?)pt *II-200! J !99&20/@ prohi4its trade using information not kno


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,Marets can re*ain irrational longer than yo+ can re*ain solent./

Lohn Maynard Keynes

2.2 The Hypothesis $efied

esearchers argue a4out the 1alidity of the efficient market hypothesis in the real markets6

especially its strong form )he main set&4ack to the theory includes slo< transmission of

information6 and relati1e po


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than a normal distri4ution a phenomenon financial literature refers to as a distri4ution8s fat tail

pponents of the theory argue that there eists a small num4er of in1estors


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returns ather6 the $MH states that a security8s price incorporates possi4le pro=ections of

future happenings6 4ased on the 4est information a1aila4le at the time )he $MH merely

estimates the performance of a stock ;f the course of e1ents 1eers the true 1alue of the

stock too far a


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2

@6?

*

*ii

rrCo

=

and the stock sensiti1ity to the market risk factor> and i

the residual return

Acti1e portfolio managers seek to gain incremental returns


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Stephen oss6


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0>;4 and 0T 4p ?!@

r 0;4 and 0T


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Since researchers recognised the eistence of asset mispricing that surpassed a1aila4le

economic theories8 a4ility to eplain them6 the study of anomalies 4egan ;t is al


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Haugen8s chart taken from http5--en


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ttttttt DcDcDcDcDcr +++++= //..''22!! 6


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)a4le 25 )he second period8s regression Lanuary !99% : ecem4er 200.

Bet in the last three years of the study period6 they


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)his o4ser1ation again corro4orates the statement that the market 4ecame more efficient 4y

this period

)a4les ! and 2 also sho< the #&statistics of days of the


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corro4orated 4y the empirical findings of #ama et al ?!99/@ performed on ( portfolios

composed of stocks of the NGS$6 AM$I and NASAZ during the years !9('& !992

2.-.# &E Effect

Studies ha1e sho


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2.-.* (er and 3nder +eaction to Earnings

Amongst other anomalies o4ser1ed is share price o1er and under reaction to earnings ne there4y the pre1ious 7osers yielded higher returns


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hold in1estment in the SP inde )he o4tained t&statistic as


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formed 4ased on past


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2.-.5 ther %noalies

ther anomalies include the follo


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Closed9end f+nds

A closed&end fund is a financial instrument that is listed on a certain day6 at a certain

,uantity6 and then initial offering takes place in a secondary market typically from a

4roker )he 1alue of the in1estments in the fund6 and the premium ?or discount@ placed on

it 4y the market are


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"+y such a fund ather6 the pu4lic is sold fund shares 4y the 4rokers or salesmen

Brokers prefer to sell those types of securities that earn them the largest amount of

commission *losed&end funds include


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2.4 Causes of the %noalies

)he o4ser1ed anomalies induced the search for causes that


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)he reason for re=ecting the hypothesis stems from the cost of information6 and this makes

the efficient market hypothesis impossi4le to eist in reality Prices cannot perfectly

reflect the information


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'hen yo+ epect things to happen 9 strangely eno+gh 9 they do happen./

LP Morgan

# /eha(ioural Finance

LP Morgan


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#inally6 the hindsight 4ias is an e1er truthful phenomenon ;t gi1es a more predicta4le

1ie< of upcoming e1ents than they really are Kno


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performance in forecasting the future He says that future performances of gaining shares

tend to 4e assessed more positi1ely than of those shares that are losing on the market )his

is called long memory in the time series

#ama(defends the efficient market theory and re4ukes that


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in1estments made in highly 1olatile instruments


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#igure '5 *APM mean ecess returns plotted against 4eta

'.2 Multiple Factors

"ith hindsight6 it is hard to eplain the success of the *APM for so long ;t painfully

lacked so many aspects of the real market6 that its simple approach


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same 4etas But B does


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that distressed firms may 4e more sensiti1e to certain 4usiness cycle factors6 like changes

in credit conditions6 than firms that are financially less 1ulnera4leD ?#ama and #rench

!99( p /%@

Possi4le eplanations for the high discount rate assigned to small capitalisation and high

B$-M$ firms cause de4ate amongst eperts )he traditional eplanation for these

o4ser1ations ad1ocated 4y #ama and #rench ?!99'6 !99(@ is that the higher returns are

compensation for higher systematic risk #ama and #rench ?!99'@ eplain that B$-M$ and

siFe proy distress and that trou4led firms are more suscepti4le to certain 4usiness cycle

factors6 like changes in credit conditions6 than firms that are financially less 1ulnera4le

)his means that in1estors are


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the a1erage ecess return of the lo


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'.' Characteristics Model of $aniel and Titan

)he three factor model confirms that firm siFes and 4ook&to&market e,uity ratios are 4oth

highly correlated


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ti


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the t&statistics for the characteristic&4alanced portfolio that has a long position in the lo

A>

H5

M5

A5

5M>++

++

=

2

@?

2

@?A

>A

5H

>H

5

HMA+

+

=

/.


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)he SMB factor sho


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++++= dHMAc5M>$$"a$$ f*fi @?

)heir regression fitted nota4ly


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6ariable

Coefficien

t !td. Error t"!tatistic &rob. +"s0uared

Csepel C 0/%9+++ 00%'+/( +0.!/%9 00000 02+%%.!HM7 &0!!2.0. 0!.+!9 &0+('(+ 0..(+

!M/ 0.+0.%( 0!!('+9 .0.2+09 0000! +M:+F 0/%0'(. 009(!%! (0'.!02 00000

Dan+"i+s C 09+9//+ 00!'9(! +0!(22' 00000 0!(9.0/HM8 0!!+'(! 002/!'9 .((%./. 00000SMB 00!%0'9 00!+0%( !0//+99 029!.

+M:+F 02+'.2/ 002.+(! !!0.2(. 00000conet C 0..0.'% 0029/'9 !.9!0.9 00000 0.0.0'/

HM8 0+/'!2( 00/.'%/ !'%.%09 00000!M/ 0+9!09! 00'/!+9 22.%++2 00000

+M:+F 0'0!!0/ 00/(%/9 /29/((( 00000gis C 0'2''0( 002%(' !!292+' 00000 0'/2909

HM8 022!0!+ 00/0.+2 .'+90'9 00000

!M/ &0(0(/(/ 00'..+2 &!+/9(! 00000 MW# &00..('/ 00/!%! &0%(!/0! 0'%92

l*+ C 0(%0'. 002./+% 2+(%0(+ 00000 022(.2!HM7 &00%!9+' 00.'!09 &!90!/'2 00/+(!M/ &0'(./'2 002%%9( &!2(!/2' 00000

MW# 00('%!+ 00.%029 !'2%+0! 0!%.."+s C &0.9!90' 002(/!+ &!%//0(+ 00000 0220'/.

HM8 0!9!2%2 00.+02! .0(% 0000!!M/ 0.%.!(9 00'20% !/092.' 00000

+M:+F 0../0'/ 00/0/(9 %%00.%+ 00000(orrasEoe C 09.'9/2 00!!+2( %0.9%% 00000 002/+!'

HM8 &00/'20! 00209!2 &2/..099 00!!!

!M/ 00'%.+/ 00!'99/ 2+.90+( 000(! MW# &0000'!2 002!%/2 &00!.2+% 09%%(

(ote C 09'+%// 00!+.!+ /'%.(!. 00000 0!'/+'+HM8 00%/%%/ 00'0%!( 2+%+0!( 000/.!M/ 00/9029 00209+/ 2%!.2'9 000/0

+M:+F 0'/.%.9 00'!.+2 !!2+.92 00000Fardenia C 0!(9/+( 00/!0%9 ''!92/' 000!0 0!0%%'(

HM7 0!''0(9 00%%%/! !.9+(/( 0!'/0!M/ &0'++/%. 00(!+/2 &(!!./09 00000

MW# &00+92+ 00%92.( &0%%%222 0'+.9H+*et C 022../. 002/!'+ %929!%/ 00000 0/(%9/2

HM8 &0'.+.+( 00..(+! &+++%(09 00000

!M/ 0+9!/%' 00'0%/2 2/(/+' 00000 +M:+F 0092'(' 00..2%2 20%/%0/ 00'+'

Gon+* C 0+%(+/. 00'9%92 !9+2202 00000 02!%0(HM7 &009090/ 00+'0.2 &!2../(( 02!..!M/ 029.'(9 00/+(2' /!0%/+( 00000

+M:+F 0.+00'/ 00/+'0! %2029%. 00000ina*ar C 0((.2(/ 002(!0. 2/..+2+ 00000 0'/''!/

HM8 &0(2+!(2 00.+(/9 &!'!/92( 00000

/+


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!M/ 0!+2%+ 00'2992 /2'9+' 00000 +M:+F &0!'2299 00//(99 &2'+/2.. 00!+9

6ariable

Coefficien

t !td. Error t"!tatistic &rob. +"s0uared

Mol C 0(./'/9 00209(' '0+%/+ 00000 0'!/+%HM8 &0.9+//9 00'(9/( &!'.('/% 00000!M/ &0'9%'% 002/2. &!/+%''( 00000

MW# 00'/9.. 00'+9'( 09.+.9+ 0'.'(Mteleo* C 0/+99!% 0022+22 2//2!+% 00000 0.//'(

HM8 &02(!9!( 00.00/% &(/'%.'2 00000!M/ &0./.'2+ 002+'/9 &!((0(0% 00000

+M:+F 0.%+00! 00.!!2 !!%.''' 00000@tp C 0(9!.(! 0020!( '.29%!9 00000 0/0../2

HM8 &022!/'! 00'//.! &(2''!2' 00000!M/ &0'(!2'2 002.2+. &!.%%!.! 00000

+M:+F 0(0++0% 00'(.%. !((/+0/ 00000

Pannonnergy C 0..(!92 00'2+9 !'(0+/! 00000 0!(20('

HM8 &0!/(%0. 00/+%+ &2+09/%9 000(9!M/ 0'%9((+ 00'9'!' 99!200' 00000

+M:+F 0/+0%(% 00(022 9.+9+0% 00000Phylaia C 0!.'.%. 00'//09 .0.0%!' 0000! 0!02(+

HM8 0.%!2!/ 00(2%/+ +(//(%( 00000SMB &00(20/. 00.29+2 &!...0. 0!.9!

+M:+F 022+'/' 00(.0+/ '/.%2'. 0000.$a"a C 0''0%0+ 002.2/! !'(.0(9 00000 0/+0+0(

HM8 0!%.(!' 00.2+/' .'!%!0. 00000!M/ 09'.2%/ 00292 '!99/9% 00000

+M:+F 02!2'! 00.'%%+ .%'+(2! 00000$ichter

Fedeon C 0!29%09 00''22( '90(+9' 0000! 0!%0'22HM8 &02//%(. 00/%/+( &.'(%!09 00000!M/ &0/..'!. 00.000( &!'(0/(( 00000

+M:+F &020//!' 00(0!29 &'.!+%+ 0000+5ynergon C 0+!%%22 002!+/% ''0'+2+ 00000 02'2(!.

HM8 &0.+000% 00'%'/+ &!22/''+ 00000!M/ 0!(+9'! 002(!9% (.!0!.+ 00000

+M:+F 0!2/%.9 00'9'+/ '!9(!%% 000!.T;G C 0+0!'%9 002.('! 2%.+/'( 00000 0'%+%!

HM8 0/.9'9 00.'!++ !2+2.!2 00000!M/ &02//'!' 0029((/ &%(0(.% 00000

+M:+F 0'/.'2' 00..2% %00!9!% 00000%ac C 099(/+% (/($&0/ !/!992% 00000 0!(+9/+

HM8 &000!!'! 0000!!/ &9%!.!' 00000!M/ &0000.++ +%.$&0/ &(0%(2+! 00000

+M:+F 0000!// 0000!!% !'0(0%% 0!920

)a4le 95 Summary ta4le of regression of the ' factors on the 2' Hungarian shares

/%


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- 8iitations of the !tudy

7imitations of this study are numerous Most importantly6 the studies that ; relied on for

eamining anomalies are outdated )he pu4lication itself of an anomaly makes it

disappear6 as ar4itrageurs rush to take ad1antage of


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is also a 1ery interesting topic to research study Unfortunately6 these ,uestions are 4eyond

the scope of this thesis

4 Conclusion

;n this thesis6 ; introduced asset pricing models )he 4irth of these models came hand in

hand


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the emerging Budapest Stock $change shares using an un&am4itious time series from

Septem4er 200' till March6 200% )hrough empirical tests on the Budapest stock echange6

; find that the return of small and high B$-M$ stocks does yield a premium "hen

regressed on the single stocks6 )he SMB and HM7 factors are positi1e on a1erage6 ie the

three factor model produced significant loadings6 indicating the model8s 1alidity for the

period tested n the other hand6 the specifics of the Hungarian market suggest that ecess

returns account for li,uidity premiums rather than compensation for distress

;n my opinion6 it is easier to find eplanations of past returns


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+eferences

A4di6 H ?200+@5 )he Bonferonni and ^idYk *orrections for Multiple *omparisons> )he

Uni1ersity of )eas at allas> utdedu-Oher1e-A4di&Bonferroni200+&prettypdf

do


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aniel K6 )itman S6 "ei L ?April 200!@5 $plaining the *ross&Section of Stock eturns

in Lapan5 #actors or *haracteristicsV )he Lournal of #inance> 3ol 73;6 No 2

a1is6 L6 #ama6 $6 #rench6 K ?#e4ruary6 2000@5 *haracteristics6 *o1ariances6 and

A1erage eturns5 !929 to !99+> )he Lournal of #inance6 3ol //6 No ! pp '%9&.0(

eBondt "6 )haler ?Luly6 !9%/@5 oes the Stock Market 1erreactV> )he Lournal of

#inance6 3ol I76 No '

#ama6 $6 #rench K ?!99'@5 *ommon risk factors in the returns on stocks and 4onds6

Lournal of #inancial $conomics ''> pp '&/(

#ama6 $6 #rench K ?March6 !99/@5 SiFe and Book&to&Market #actors in $arnings and

eturns> )he Lournal of #inance6 3ol /06 No ! pp !'!&!//

#ama6 $6 #rench K ?March6 !99(@5 Multifactor $planations of Asset Pricing Anomalies>

)he Lournal of #inance6 3ol /!6 No ! pp //&%.

#ama6 $ ?!99%@5 Market $fficiency6 7ong&)erm eturns6 and Beha1ioral #inance> Lournal

of #inancial $conomics .9 p2%'&'0(

#ama6 $6 #rench K ?Summer6 200.@5 )he *apital Asset Pricing Model5 )heory and

$1idence> )he Lournal of $conomic Perspecti1es6 3ol !%6 No ' pp 2/&.(

#oster6 P6 Stine6 A ?200'@5 PonFironi eturns5 Ho< to distinguish a conD from a

good in1estment using only statistics> "orking paper> )he "harton School6 Uni1ersity of

Pennsyl1ania

Haugen6 ?!999@5 )he ;nefficient Stock Market6 "hat Pays ff and "hy> Prentice Hall6

Upper Saddle i1er6 Ne< Lersey

('


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Legadeesh N6 )itman S;March 1 1ol .%6 No !6 pp

(/&9!

Kappou K6 Brooks *6 "ard * ?May 200+@5 )he SP /00 ;nde $ffect in *ontinuous

)ime5 $1idence from 1ernight6 ;ntraday and )ick&4y&)ick Stock Price Performance>

;*MA *entre6 Uni1ersity of eading6 http5--papersssrncom-sol'-paperscfmV

a4stractWid99!%/%do ""

Norton *ompany ;nc> /00 #ifth A1enue6 NG6 !0!!0

Saunders $ ?ecem4er6 !99'@5 Stock Prices and "all Street "eather> )he American$conomic e1ie 1ol %'6 No / p !''+&!'./

Singal 3 ?200(@5 Beyond the andom "alk5 A uide to Stock Market Anomalies and

7o ford Uni1ersity Press6 USA

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)XmYri6 L ?200/@5 HatCkonysYg Cs anomYliYk a 4udapesti CrtCkt`FsdCn>


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%ppendi7 1

Hierarchical cluster analysis according to e,uity capitalisation using


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Hierarchical cluster analysis according to 4ook&to&market e,uity ratio using


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helenanaffa a multifactor approach in understanding asset pricing anomalies

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