Journal of Accounting Advances (J.A.A)
Vol. 8, No. 1, 2016, Ser. 70/3
 
 
Extended Abstract
 
Size, Value and Momentum Premiums: Evidence from Empirical Pricing Models
 




Dr. Ali Saghafi*


Roohollah Farhadi**
 




Abbas Dadras***




 
Introduction
       Existence of size, value and momentum premiums in equity returns is the key factor in tests of empirical pricing models. There is evidence that value stocks have higher returns than growth stocks (Fama and French, 1992). Banz (1981) found that stocks of small firms have higher returns relatively to stocks of big firms. Also, some studies show momentum (Carhart, 1997). In this research, risk factors are computed and capital assets pricing models such as CAPM, Fama and French Three-Factor Model and Four-Factor Model are tested.
 
Research Hypotheses
       1. Empirical assets pricing models can explain stock returns.
       1.1. CAPM can explain stock returns.
       1.2. Three-factor model can explain stock returns.
       1.3. Four-factor model can explain stock returns.
 
 
Methods
       By using portfolio studies approach and significant test of regression (t static and f static) and using 195 firms of TSE in 2008-2014, we create portfolios based on Size-B/M and portfolios based on Size-Momentum.
 
Results                       
       Using risk factors (SML, HML, and WML) as right hand side (RHS) variables in the regression equations and excess returns of portfolios created based on size, B/M ratio, and momentum as left hand side (LHS) variable, we examined  explanatory power of CAPM, three factor model of Fama and French (1993) and Four factor model of Carhart (1997). By examining the factors and results of the regression models, we find evidence of size effect for growth stocks, reverse size effect for value stocks, reverse value effect for small firms and value effect for big firms and finally reverse momentum effect was reported for all firms. The intercept coefficients of estimated pricing models (CAPM, three-factor and four-factor models) showed that only three-factor model can completely explain excess returns of portfolios. However, the explanatory power of the four-factor model was also reported. Therefore, among the pricing models, only three-factor model is not rejected.
 
Discussion and Conclusion
       This research showed that the three-factor model has higher explanatory power than other models and can delete alphas (intercepts), but other models were rejected. Perhaps an explanation for the failure of pricing models is picking of pricing ratios in creating of portfolios. Specially, Hou et al. (2011) argue that the ratio used in creating of HML is an important decision in testing pricing models. For example, in creating of size-value matrix, Fama and French (1993) used earnings-price ratio (E/P) and the ratio of cash flow to price (CF/P) instead of B/M ratio and reports similar results. Given the failure of the models tested in this study, it is suggested researchers use other pricing models that consider other risk factors such as time risk.
 
Keywords: 1. Size premium, 2.Value effect, 3. Reverse momentum effect, 4.Three-factor model, 5.Four-factor model
 
 
 



* Professor of Management and Accounting, Faculty of Allame Tabatabai University


** Ph.D. Student of Financial Management, Allame Tabatabai University (Corresponding Author), rf.farhadi@gmail.com


*** MSc of Financial Management Shahid Beheshti University