Relevant Factors to Explain Cross-Section of Expected Returns of the Firms Listed in the Dhaka Stock Exchange

Abstract

Using the well-known Fama-MacBeth methodology, this paper investigates the factors that may influence the cross-section of stock returns in the Dhaka Stock Exchange (DSE). Various combinations of factors such as dividend yield, size, price-earnings ratio, market return, spread between large and small firms, lagged values of factors, illiquidity of stocks, and cross-sectional volatility of the market are considered. However, results show that these factors hardly explain the cross-section of stock returns. Only market returns weakly explain stock returns. Interestingly, the relationship between market returns and stock returns has been consistently found to be negative, which contradicts the established notion of positive risk-return relationship. Even after considering for the effects of size, liquidity, and sub-periods, results do not change much

The Size and Value Effect to Explain Cross-Section of Expected Stock Returns in Dhaka Stock Exchange

“…Mobarek and Mollah (2005), Chowdhury and Sharmin (2013) who found a negative relation between stock return and risk in DSE, but they all have evidenced the existence of the factors (market, size and value) in the Dhaka stock exchange.…”

“…Mobarek and Mollah (2005) revealed a significant relation of size and price to book with share return in DSE. Chowdhury and Sharmin (2013) evidenced that size factor have no power to explain cross section of expected return in DSE. It is evidenced that no author attempted to investigate particularly for size and value effect in Bangladesh although Chowdhury et al (2008) did attempt only for size effect.…”

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

“…As for example, Mobarek and Mollah (2005), Chowdhury and Sharmin (2013) find negative relationship between stock returns and market beta. Regarding other factors of stock returns, Mobarek and Mollah (2005) find that size, B/M ratio, volume, earnings yield, and cash flow yield have significant influence on stock returns in DSE, which contradict with the findings of Chowdhury and Sharmin (2013). Because Chowdhury and Sharmin (2013) find that size, dividend yield, P/E ratio, and liquidity have no ability to explain the cross-section returns of stock.…”

“…Regarding other factors of stock returns, Mobarek and Mollah (2005) find that size, B/M ratio, volume, earnings yield, and cash flow yield have significant influence on stock returns in DSE, which contradict with the findings of Chowdhury and Sharmin (2013). Because Chowdhury and Sharmin (2013) find that size, dividend yield, P/E ratio, and liquidity have no ability to explain the cross-section returns of stock. On the contrary, Rahman et al (2006) and Hasan et al (2015) find stock returns are positively and linearly related with market return.…”

“…In his model Sharpe (1964) measures magnitude of dependency of stock returns on market by the parameter beta (  ). Later the capacity of beta to explain returns of stock is questioned in the study of Novak and Petr (2011), Mobarek and Mollah (2005), and Chowdhury and Sharmin (2013) respectively in Swedish and Dhaka stock market. These studies reveal that beta has either little information about stock returns or it is totally unrelated to the cross section returns of stock.…”