A comparative test of multifactor asset pricing models in the dynamic regimes of Financial Crisis: Evidence from emerging market regions Asia, EMEA, and Americas

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Madiha Riaz Bhatti, Ather Azim Khan

Abstract

This research study extends the asset-pricing literature by investigating the relative performance of five different asset-pricing models, including CAPM by Sharpe (1964) and Lintner (1965), 3FM by Fama and French (1993), Carhart’s (1997) 4FM, 5FM by Fama-French (2015), and the author’s proposed 10FM, which in addition to market risk, size, value, profitability, and investment factors, incorporate momentum, liquidity, leverage, government bonds risk, and commodity risk as additional asset-pricing factors. This study aims to test the well-advocated asset-pricing factors jointly and comprehensively in one model. It also checks the robustness of all considered asset-pricing models around the GFC. Following this, the entire sample period of 21 years, consisting of 252 months split up into three sub-periods: pre-crisis, crisis, and post-crisis. We employed panel data analysis covering an extensive sample of financial equities from 21 emerging markets across the three regions of MSCI’s classified emerging market economies: Asia, EMEA, and Americas. Moreover, the GRS-F test suggested by Gibbons et al. (1989) was applied to select the best model. Findings are stimulating as CAPM failed to prove valid ubiquitously; however, we conclude that 3FM is a successful and most appropriate asset-pricing model in describing the average portfolio returns for region Asia. While 5FM is better than other asset-pricing models for the region, EMEA and 10FM is the second-most appropriate model for the region. And for the region, Americas 10FM is the most suitable and reliable multifactor model since it outperformed all other asset-pricing models.


 

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