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The Impact of the Financial Sector on Asset Pricing Tests: Evidence from the Colombo Stock Exchange

Author

Listed:
  • Amal Peter Abeysekera
  • Nimal Pulukkuttige Don

Abstract

This paper aims to identify how the inclusion of financial sector affects the ability of asset pricing models to explain the average stock returns in the CSE. Most of the asset pricing researches, the firms in the financial sector are excluded on the basis that their characteristics and the leverage are notably different than firms in other industries. Therefore the objective of this study is to identify the impact of the inclusion of financial sector on the ability of the Carhart four-factor model to explain the average stock returns in the CSE and to compare its performance with the Capital Asset Pricing Model (CAPM) and the Fama and French three-factor model. The study finds that the four-factor model; incorporating the market premium, size premium, value premium and momentum premium provides a satisfactory explanation of the variation in the cross-section of average stock returns in the CSE, even when the financial sector is included. It is found that the Carhart four-factor model performs better than the CAPM in all scenarios; and that it performs notably better than the Fama and French three-factor model.However, there is no notable difference in the findings either the financial sector is included or not.

Suggested Citation

  • Amal Peter Abeysekera & Nimal Pulukkuttige Don, 2016. "The Impact of the Financial Sector on Asset Pricing Tests: Evidence from the Colombo Stock Exchange," Asian Journal of Finance & Accounting, Macrothink Institute, vol. 8(2), pages 113124-1131, December.
    • Handle: RePEc:mth:ajfa88:v:8:y:2016:i:2:p:113124
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    References listed on IDEAS

    as
    1. Foerster, Stephen R. & Sapp, Stephen G., 2005. "Valuation of financial versus non-financial firms: a global perspective," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(1), pages 1-20, January.
    2. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
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    More about this item

    JEL classification:

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

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