Implement Fama And French And Capital Asset Pricing Models In Saudi Arabia Stock Market

Abstract

This paper applies two of the famous asset pricing models in finance (Capital Assent Pricing model and Fama and French 1993 three factor model) in an emerging market with an Islamic Culture: Saudi Arabia Market (Tadwal), Generalized Methods of Moments and t Test statistical techniques were used to find the coefficients and to compare between real and expected returns.The results show that Fama and French 1993 model has more explanatory power and do a better job in explaining the changes in stock returns than the CAPM, and those developed market models can be applicable in emerging markets like Saudi Arabia. CAPM model has a clear evidence for its applicability while Fama and French Model has a clear evidence for the market return but not a clear evidence for the size and book to market return. Finally the results show that we can predict the stock prices by using any of those two models which means that the Saudi Arabia Market is inefficient pricing Market.The modernity and low number of companies has a big effect on the results, in addition the strong purchasing power and strong cash availability.Finally we recommend to appply more modern pricing models at the micro and macro level and add variables consistent with the Islamic Culture of Saudi Arabia.

The Comparison of Application of Stock Return Evaluation in Recorded Companies in Lq 45 for the 2012-2016 Period

“…In addition this is because SMB and HML in the company are considered to have a very important role for the sustainability of the company, so that the SMB and HML variables can explain the ability to generate returns for investors. The results of other studies supporting this study were carried out by Aldaarmi, et al (2015) whose results show that the Fama and French 1993 model has more clear power and power in explaining changes in stock returns.…”

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“…The outperformance of the three-factor model over the traditional CAPM has also been found in the Indian stock market by Bartholdy and Peare (2005). Similar evidences were being reported by Taneja (2010) and Aldaarmi et al (2015) in the Indian and Saudi Arabian stock markets, respectively. Walid (2009) in his paper provided stronger support for the characteristic model rather than Fama-French three-factor model in explaining return dynamics of the Japanese stock market.…”

The Impact of Financial Leverage on the Pricing Risk in the Egyptian Stock Market

“…They also found that the size and value factors (SMB & HML) are not sufficient to explain the cross-section variance of expected returns either individually or jointly with each other, but when the market factor (R M -R F ) is combined with the size and value factors (SMB & HML), this would increase the explanatory power of the model, where the results showed that the explanatory power of the (R M -R F ) individually was greater than the explanatory power of the total size and value. Aldaarmi et al (2015) examined the ability of the Capital Assets Pricing Model (CAPM) and Fama and French (1993) In this study we used monthly data for a sample of firms listed on the Egyptian Stock Exchange from January 2014 to December 2018 to examine the performance of the Fama-French three-factor model (1993) before and after adding the financial leverage factor as a risk factor, where we will try to identify the impact of financial leverage on the risk pricing in the Egyptian Stock Exchange by adding an additional risk factor reflecting Financial leverage to the Fama and French (1993) model, where the Fama and French (1993) model will be tested in its original form and re-tested after adding the additional risk factor. These data included:  Monthly stock returns.…”