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Capturing Profitability in Asset Pricing Models for Japanese Equities 1994-2016

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  • Dong Liu
  • Hiroshi Yadohisa

Abstract

We follow Ball et al. (2015) to investigate and compare firms¡¯ gross profit, operating profit, and net income as predictors of returns for a cross-section of traded Japanese equities spanning 1994-2016. We test the predictive power of profit measures on cross-sectional stock returns using portfolio tests and Fama-MacBeth regressions, find that gross-profit-to-book-equity significantly predict returns on sampled stocks. Consistent with Novy-Marx (2013), we also find that sorting portfolios by gross profitability and book-to-market ratios outperform in the Japanese market. Hence, we create a Market-Profitability-Value model that captures value and profitability premium among returns of sampled stocks. Based on Gibbons-Ross-Shanken test and economic value, we demonstrate that our enhanced model outperforms Fama¨CFrench multiple-factor model in isolating influences on equity returns.

Suggested Citation

  • Dong Liu & Hiroshi Yadohisa, 2018. "Capturing Profitability in Asset Pricing Models for Japanese Equities 1994-2016," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(5), pages 254-260, May.
    • Handle: RePEc:ibn:ijefaa:v:10:y:2018:i:5:p:254-260
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    More about this item

    Keywords

    expected return; gross profitability; operating profitability; net income;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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