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A Comparative Evaluation of the Predictability of Fama-French Three-Factor Model and Chen Model in Explaining the Stock Returns of Tehran Stock Exchange

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  • Hamid Reza Vakilifard

    ()
    (Islamic Azad University)

  • Forough Heirany

    ()
    (Islamic Azad University)

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    Abstract

    Investors ought to select among different choices and various opportunities which are based on different characteristics and returns. The ultimate goal of most stakeholders, managers and other decision makers of the stock markets are acquiring expected return which is accompanied by risk. This is the reason for the necessity of the balance between risk and return. It is then required to design a model which can satisfactory predict the expected return. The present paper intends to use the two models of three-factor Fama-French and Chen model to contribute the decision makers in investigating the predictability of these two models for selecting the optimum expected return. The sample is composed of 52 listed firms on the Tehran Stock Exchange for the years of 2003 to 2010 which are selected by filtering technique. The gathered data is analyzed by applying multivariate regression method. The findings reveal that the Fama-French model has higher ability in predicting the expected stock return in the capital markets.

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    Bibliographic Info

    Article provided by Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences in its journal International Journal of Academic Research in Accounting, Finance and Management Sciences.

    Volume (Year): 3 (2013)
    Issue (Month): 3 (July)
    Pages: 118-124

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    Handle: RePEc:hur:ijaraf:v:3:y:2013:i:3:p:118-124

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    Web page: http://hrmars.com/index.php/pages/detail/Accounting-Finance-Journal

    Related research

    Keywords: Market Risk Premium; Firm Size; M/B Ratio; Investment Value; ROE;

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    1. Marshall, Ben R. & Young, Martin, 2003. "Liquidity and stock returns in pure order-driven markets: evidence from the Australian stock market," International Review of Financial Analysis, Elsevier, vol. 12(2), pages 173-188.
    2. Rajgopal, Shiva & Venkatachalam, Mohan, 2011. "Financial reporting quality and idiosyncratic return volatility," Journal of Accounting and Economics, Elsevier, vol. 51(1-2), pages 1-20, February.
    3. Fama, Eugene F. & French, Kenneth R., 2006. "Profitability, investment and average returns," Journal of Financial Economics, Elsevier, vol. 82(3), pages 491-518, December.
    4. Lubos Pastor & Robert F. Stambaugh, 2001. "Liquidity Risk and Expected Stock Returns," NBER Working Papers 8462, National Bureau of Economic Research, Inc.
    5. Acharya, Viral V & Pedersen, Lasse Heje, 2004. "Asset Pricing with Liquidity Risk," CEPR Discussion Papers 4718, C.E.P.R. Discussion Papers.
    6. Rajgopal, Shiva & Venkatachalam, Mohan, 2011. "Financial reporting quality and idiosyncratic return volatility," Journal of Accounting and Economics, Elsevier, vol. 51(1), pages 1-20.
    7. Rahul Verma, 2011. "Testing forecasting power of the conditional relationship between beta and return," Journal of Risk Finance, Emerald Group Publishing, vol. 12(1), pages 69-77, January.
    8. Jorgensen, Bjorn & Li, Jing & Sadka, Gil, 2012. "Earnings dispersion and aggregate stock returns," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 1-20.
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