Explaining stock returns in Nepal: application of single and multi-factor models.

Karki, Dipesh; Ghimire, Binam

Abstract

This paper investigates the relevance of CAPM single factor and Fama-French three factor (Fama-French) models to explain the return for cross sectional portfolios in the context of Nepalese stock market. We use stock market data and treasury bill rate over the period of August 2007 to July 2013 and estimate the factor models after correcting for the violation of classical linear regression assumptions. Our results show that in all five portfolios (B/L, B/M, B/H, S/M, S/H), three factor model has better explanatory power over CAPM. The estimations of Fame-French showed that Excess market return (ER) and Value factor are more significant than Size factor in model fitting. Finally, the study tested for the seasonality in Nepalese stock return using the dummy variable. The results showed significant seasonality effect for fiscal year end thus indicating possibility of tax loss effect in Nepalese stock market but seasonality effect on account of festival period is found to be insignificant.

Citation

KARKI, D. and GHIMIRE, B. 2016. Explaining stock returns in Nepal: application of single and multi-factor models. Journal of finance and investment analysis [online], 5(3), pages 59-77. Available from: https://www.scienpress.com/journal_focus.asp?main_id=69&Sub_id=IV&Issue=1911

• Journal Article Type: Article
• Acceptance Date: Aug 30, 2016
• Online Publication Date: Sep 15, 2016
• Publication Date: Sep 30, 2016
• Deposit Date: Aug 20, 2024
• Publicly Available Date: Aug 20, 2024
• Journal: Journal of finance and investment analysis
• Print ISSN: 2241-0988
• Electronic ISSN: 2241-0996
• Publisher: Scienpress
• Peer Reviewed: Peer Reviewed
• Volume: 5
• Issue: 3
• Pages: 59-77
• Keywords: Stock markets; Stock market returns; Nepal
• Public URL: https://rgu-repository.worktribe.com/output/2439900
• Publisher URL: https://www.scienpress.com/journal_focus.asp?main_id=69&Sub_id=IV&Issue=1911