AN INVESTIGATION INTO THE ROLE OF FOUR FACTOR ASSET PRICING MODEL EVIDENCE FROM THE STOCK EXCHANGE OF THAILAND.

Abstract

This paper examines the role of CAPM, Fama-French, and four-factor asset pricing model in stock returns in a Thai stock market. Using the four-factors include the market factor (market risk premium, MKT), the size factor (small market capitalization minus big market capitalization, SMB), the book-to-market factor (high book-to-market equity ratio minus low book-to-market equity ratio, HML), and the momentum factor (winners minus losers, WML). Our data cover stocks traded in the Stock Exchange of Thailand (SET100) from April 2002 to March 2013. Monthly excess stock returns are computed from nine testing portfolios based on size and book-to-market ratios. Time series regressions following Fama and French (1992) are employed to test CAPM, Fama-French, and four-factor model on these nine testing portfolios. The test result shows that the Gibbons-Ross-Shanken (GRS) statistic reject the null hypothesis of zero alphas (risk-adjusted excess return) in every model. The four-factor model has adjusted-R2 value more than traditional CAPM model. However, the adjusted-R2 value of Four-factor model is equal to Fama-French model can explain stock returns in Thai stock market as well as four-factor model. KEY WORDS: Fama-French’s three factor model / Carhart’s four factor model, Asset pricing, Thai stock return