The study of five-factor asset pricing model on Thailand stock market: evidence from a new price impact ratio.

Abstract

This paper examines the role of liquidity in stock returns in a Thai stock market. Using the five-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), the momentum factor (winners minus losers, WML) and liquidity factor (LIQ). 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 the five-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. However, the five-factor model has the most adjusted-R2 value compare to other models. In conclusion, the five-factor model is the best model to explain stock returns in Thai stock market. The result also shows that the momentum factor is not found to be priced. KEY WORDS: Fama-French’s three factor model / Carhart’s four factor model / Amihud’s liquidity / Asset pricing / Thai stock return