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

Abstract

This paper mainly studies the size and value effect to explain cross-section of expected returns in Dhaka Stock Exchange (DSE) in Bangladesh. Using the well-known Fama and French (1993) three-factor methodology in association with descriptive statistics we have evidenced that small size firms along with high book to market (BM) firms tend to produce higher average monthly returns than big firms along with low BM firms do. We also found that the size and value premium as well as market risk premium have very strong power to explain cross-section of expected return in DSE. The validity of three-factor model is also examined in this study and found that the three-factor model is well fitted in DSE with high R square value. One notable observation is that the market risk premium is the only factor which is significant in all portfolios and in all sample data and has dominant power over other factors.

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

“…research findings regarding factors of returns of stock are observed in the stock market of Bangladesh. As for example, the negative relationship between market return and returns of stock of Mobarek and Mollah (2005) contradicts with positive relationship of the same of Rahman, Baten, and Alam (2006) and Hasan, Alam, Amin, and Rahaman (2015) in DSE, which is one of the emerging stock markets in the world. In addition, it challenges the argument of having positive relationship between market return and returns of stock of ex-ante asset pricing models and motivates the researchers to initiate this study.…”

“…In addition, it challenges the argument of having positive relationship between market return and returns of stock of ex-ante asset pricing models and motivates the researchers to initiate this study. Third, Hasan et al (2015) claim that there remains no other factors to explain returns of stock in DSE after applying three-factor model of Fama and French (1996). This claim of Hasan et al (2015) suffers from the drawback that their study violates the condition of eligible samples for testing three-factor model of Fama and French (1996) by including bank and non-bank financial institutions into their samples.…”

Fundamentals of Common Stock Pricing: Evidence from Commercial Banks of Nepal

“…They found enough evidences to reject the assumptions of conditional normality in stock prices data series and accepted the existence of stock volatility. In an attempt to explain cross-section of expected returns in Bangladesh Hasan et al (2014) conducted a study regarding the size and value effect. The results found that small size firms with high book to market ratio tend to provide higher average monthly returns than big size firms.…”

Impact of Macroeconomic Variables on Size and Book To Market Effects in Stock Returns: Evidence from Sri Lanka

“…Further, some recent studies conducted for emerging markets have included the financial sector companies to the study (Hasan et al, 2015, Nawazish, 2008.…”

“…, Haque and Sarwar (2013),Shijin et a! (2008),Nawazish (2008),Meng and Ju (2013),Hasan et al (2015) and many others use this time series multiple regression in their studies. In their studies that deploy three -factor model the intention is to check whether the explanatory power of the model increase with the inclusion of value and size factor.…”