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Multifactor Models are Alive and Well

Author

Listed:
  • Michael E. Drew
  • Madhu Veeraraghavan

Abstract

A large number of studies have investigated the cross-section of average returns on common stocks in the United States and have found little relationship with the estimated beta of the single-factor model. This paper tests the joint roles of an overall market factor, and factors related to firm size (market equity) and style (book equity to market equity) in the cross-section of average stock returns in Australia, as there is little evidence available on the asset pricing theory in markets outside the United States. This paper also tests the claim that the size and style effect is the result of seasonal phenomena. We report that the three-factor model largely explains the variation in stock returns in a meaningful pattern. We also observe that size and style factors do a good job throughout the sample period and reject the claim that these effects are due to seasonal phenomena. Our results document that the explanatory power of the three-factor model is not restricted to a limited set of portfolios. Moreover, our findings do not support the data-snooping hypothesis.

Suggested Citation

  • Michael E. Drew & Madhu Veeraraghavan, 2000. "Multifactor Models are Alive and Well," School of Economics and Finance Discussion Papers and Working Papers Series 083, School of Economics and Finance, Queensland University of Technology.
  • Handle: RePEc:qut:dpaper:083
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    File URL: http://external-apps.qut.edu.au/business/documents/discussionPapers/2000/Drew_Veeraraghaven_83.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Kathleen Goffey & Andrew Worthington, 2002. "Motor Vehicle Usage Patterns in Australia: A Comparative Analysis of Driver, Vehicle & Purpose Characteristics for Household & Freight Travel," School of Economics and Finance Discussion Papers and Working Papers Series 117, School of Economics and Finance, Queensland University of Technology.

    More about this item

    Keywords

    Asset Pricing; Multifactor Models; Seasonality Premium; Size and Book-to-Market;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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