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Impact Of Liquidity And Size Premium On Equity Price Formation In Serbia

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  • Jelena Minović
  • Boško Živković
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    Abstract

    The goal of this paper is to examine the impact of an overall market factor, the factor related to the firm size, the factor related to the ratio of book to market value of companies, and the factor of liquidity risk on expected asset returns in the Serbian market. For this market we estimated different factor models: Capital Asset Pricing Model (CAPM by Sharpe, 1964), Fama-French (FF) model (1992, 1993), Liquidity-augmented CAPM (LCAPM) by Liu (2006), and combination LCAPM with FF factors. We used daily data for the period from 2005 to 2009. Using a demanding methodology and complex dataset, we found that liquidity and firm size had a significant impact on equity price formation in Serbia. On the other hand, our results suggest that the factor related to the ratio of book to market value of companies does not have an important role in asset pricing in Serbia. We found that Liu’s two-factor LCAPM model performs better in explaining stock returns than the standard CAPM and the Fama-French three-factor model. Additionally, Liu’s LCAPM may indeed be a good tool for realistic assessment of the expected asset returns. The combination of the Fama-French model and the LCAPM could improve the understanding of equilibrium in the Serbian equity market. Even though previous papers have mostly dealt with examining different factor models of developed or emerging markets worldwide, none of them has tested factor models on the countries of former Yugoslavia. This paper is the first to test the FF model and LCAPM with FF factors in the case of Serbia and the area of ex-Yugoslaviа.

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    Bibliographic Info

    Article provided by Faculty of Economics, University of Belgrade in its journal Economic Annals.

    Volume (Year): 57 (2012)
    Issue (Month): 195 (October - December)
    Pages: 43-78

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    Handle: RePEc:beo:journl:v:57:y:2012:i:195:p:43-78

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    Related research

    Keywords: CAPM; Fama-French model; Liu’s LCAPM; Liquidity; Zero Rates;

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    References

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    1. Jin, Li & Myers, Stewart C., 2006. "R2 around the world: New theory and new tests," Journal of Financial Economics, Elsevier, Elsevier, vol. 79(2), pages 257-292, February.
    2. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, American Finance Association, vol. 51(1), pages 55-84, March.
    3. Bekaert, Geert & Harvey, Campbell & Lundblad, Christian T., 2006. "Liquidity and Expected Returns: Lessons from Emerging Markets," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5946, C.E.P.R. Discussion Papers.
    4. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, American Finance Association, vol. 19(3), pages 425-442, 09.
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