The focus of this paper is to test whether the Fama and French three-factor and five factor models can capture the variations of returns in the Egyptian stock market as one of the growing emerging markets over the time-period July 2005 to June 2016. To achieve this aim, following Fama and French (2015), the authors construct the Fama and French factors and three sets of test portfolios which are: 10 portfolios double-sorted on size and the BE/ME ratio, 10 portfolios double-sorted on size and operating profitability, and 10 portfolios double-sorted on size and investment for the Egyptian stock market. Using time-series regressions and the GRS test, the results show that although both models cannot be rejected as valid asset pricing models when applied to portfolios double-sorted on size and the BE/ME ratio, they still leave substantial variations in returns unexplained given their low adjusted R2 values. Similarly, when the two models are applied to portfolios double-sorted on size and investment, the results of the GRS test show that both models cannot be rejected. However, when the two models are applied to portfolios double-sorted on size and operating profitability, the results of the GRS test show that both models are strongly rejected which imply that both models leave substantial variations in returns related to size and profitability unexplained. Specifically, the biggest challenge to the two models is the big portfolio with weak profitability which generate a significantly negative intercept implying that the models overestimate its return.
Purpose: The persistence of momentum in stock returns across both developed and emerging markets and the challenges that it poses against the Efficient Market Hypothesis created a need to explain its existence. Grinblatt and Han (2005) formulated a model to explain momentum using a well documented behavioral bias which is the Disposition effect. The focus of this paper is to analyze whether disposition effect drives momentum in the Egyptian stock market as one of the growing emerging markets that faces a considerable lack in behavioral studies. Design/methodology/approach:The study is quantitative in nature studying whether disposition effect drives momentum using a sample of 48 companies through the time period 2004-2010. The relation between disposition effect and momentum will be analyzed empirically using Fama Macbeth cross-sectional regression.Findings: Results show that there is no momentum in stock returns in the Egyptian stock market. In addition they show that disposition effect does not drive momentum in the Egyptian stock market as there is no significant relation between expected return and capital gain overhang. The results reveal useful insights about the Egyptian stock market that can be of beneficial use for both practitioners and academics. Research limitations/implications:Limited number of active companies in the Egyptian stock market as well as the limited available historical data poses some restrictions in the implementation of Fama Macbeth regression and the calculation of reference price. In addition analyzing the profitability of momentum strategies across different market states may be required to provide complete picture about momentum in the market. Practical implications:Relative strength strategies do not earn abnormal return in the Egyptian stock market, so practitioners are not advised to follow such strategies. In addition more advanced market mechanisms should be applied in the Egyptian stock market to improve its efficiency as well as increase the speed of information dissemination in the prices.Originality/value: Detailed analysis of literature review reveals a significant gap in academic studies about the Egyptian stock market. This paper aims to fill this gap by analyzing whether there is momentum in stock returns and whether disposition effect drives momentum in the Egyptian stock market that differs from other markets where Grinblatt and Han (2005) has been previously applied and hence this provides an out of sample test of the model.
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