Factors of Stock Return and Carhart Model: The Case of Dhaka Stock Exchange (DSE) of Bangladesh

Abstract

The objective of this study is to find factors of stock return by testing validity of Carhart model in Dhaka Stock Exchange (DSE) of Bangladesh. For this purpose, this study uses monthly excess return of portfolios, size, book-to-market value, market return, and price momentum data of 109 sample firms to calculate return factors such as market risk premium, size premium (SMB), value premium (HML), and momentum effect (UMD) for the sample period of 2005 to 2014. Then a total of ten portfolios, six based on size and book-to-market value and four based on size and price momentum, are constructed in this study. Excess return of each of these portfolios are calculated and regressed on the above four factors. Results of this study reveal that in DSE, market risk premium is positively and significantly related with the excess return of all portfolios; Size premium is found positively and significantly related with the return of small size portfolios; Value premium is found negatively and significantly related with the returns of all portfolios except one big portfolio (B/H); momentum effect is found positively and significantly related to the excess return of up (U), big (B), and small (S) size portfolios. It is also evident from R2 value, F statistic, and robustness test of this study that four-factor model is valid and it can predict portfolio returns accurately when there is no abnormality such as market crash occurs in DSE.