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ABSTRACT
In this paper, we propose an extended five-factor asset pricing model in Egypt. Beside market, size and book-to-market, we investigate whether earnings-to-price, sales-toprice, dividends-to-price, liquidity and momentum are priced risk factors. Factors are formed using Fama and French (1993) methodology. Ordinary least squares time series regression is run using HAC method-Newey and West (1987) using 55 companies during the period from July 2005 to June 2013.We document significant size and value effects. Book-to-market does not absorb the role of earnings-to-price. Liquidity plays an important role. Sales-to-price and dividends-to-price are redundant. There is no momentum effect in Egypt. We conclude that a model, which incorporates market factor, firm size, book-to-market, earnings-to-price and liquidity, yields better results than the competing models. We assess the performance of the proposed model based on different evaluation criteria. The robustness of the model is tested for the separation of up and down market periods.
JEL Classifications: G11, G12
Keywords: CAPM; Fama and French three-factor model; Carhart four-factor model; Chan and Faff four-factor model; size effect; value effect; momentum effect
(ProQuest: ... denotes formulae omitted.)
I.INTRODUCTION
One of the most debatable topics in financial literature is identifying determinants of stock returns. The literature has progressed from a single-factor model to multi-factor models. Currently, there is practical evidence that stock returns can be determined by a combination of several risk factors rather than one sole factor. Both institutional and individual investors in Egypt use different variables in the stock selection process. These variables include, but are not limited to price-based ratios (e.g., book-to-market equity, earnings-to-price, sales-to-price and dividends-to-price ratios), investment factors (e.g., investment-to-assets and assets growth ratios), prior returns (momentum and reversal), profitability ratios, leverage ratios and liquidity factor.
With a large variety of variables, determining a well specified asset pricing model, to explain variations in stock returns, becomes very complicated and confusing. The choice of a model based on risk factors or firm characteristics becomes unclear to both academics and practitioners in Egypt.
The Capital Asset Pricing Model (CAPM), developed independently by Sharpe (1964) and Lintner (1965), is the first model built to determine the expected rate of returns on risky assets. An essential argument is on the sole role of the systematic risk in the model. Researchers notice...