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MARKET BEHAVIOR AND TI-IE CAPITAL ASSET PRICING MODEL IN THE SECURITIES EXCHANGE OF THAILAND: AN EMPIRICAIL APPLICATION PAIBOON

SAREEWIWATTHANA AND R. PHIL MALONE' INTRODUCTION Security market behavior in foreign countries has recently become the focus of empirical testing regarding market behavior and Capital Asset Pricing Model (CAPM) theory. Over the last two decades a substantial amount of empirical research has been undertaken to investigate market behavior in the US and other major industrial countries of the world. While a limited number of empirical works are available for the stock exchange of some less developed countries, considerable testing still needs to be undertaken for the underdeveloped capital markets of the world. The objective of this study is to ascertain risk-return perceptions prevailing in the Securities Exchange of Thailand (SET). An additional effort is made to determine how domestic investors view risk and what the risk~return structure is within the SET. REVIEW OF THE LITERATURE 771s Capital Asset Pricing Model The traditional Capital Asset Pricing Model (CAPM) is developed mainly by Sharpe (1964) and others. According to the CAPM, the equilibrium return of asset I' is related to the return of the market portfolio by the equation: . E(Rf,,) = Rh + Bi (E(Rm,l) _ Rn) (1) where Rf, is the risk free rate of interest, E(R,,,,,) is the expected return of the market portfolio, and B, is a measure of systematic risk. Under the CAPM, all residual or unsystematic risk is diversifiable and investors hold portfolios that represent linear combinations of the risk free asset and the market portfolio. A ' The authors are respectively, Assistant Professor at the University of Evansville; and Associate Professor at the University of Mississippi. They wish to thank the anonymous referee for helpful comments and suggestions. (Paper received August 1984, revisedjanuary 1985)

]0umal1jBLu'ines.t Finance G1AccaunlI`ng, 12(3), Autumn 1985, 0306 686X $2.50 MARKET BEHAVIOR AND TI-IE CAPITAL ASSET PRICING MODEL IN THE SECURITIES EXCHANGE OF THAILAND: AN EMPIRICAIL APPLICATION PAIBOON SAREEWIWATTHANA AND R. PHIL MALONE' INTRODUCTION Security market behavior in foreign countries has recently become the focus of empirical testing regarding market behavior and Capital Asset Pricing Model (CAPM) theory. Over the last two decades a substantial amount of empirical research has been undertaken to investigate market behavior in the US and other major industrial countries of the world. While a limited number of empirical works are available for the stock exchange of some less developed countries, considerable testing still needs to be undertaken for the underdeveloped capital markets of the world. The objective of this study is to ascertain risk-return perceptions prevailing in the Securities Exchange of Thailand (SET). An additional effort is made to determine how domestic investors view risk and what the risk~return structure is within the SET. REVIEW OF THE LITERATURE 771s Capital Asset Pricing Model The traditional Capital Asset Pricing Model (CAPM) is developed mainly by Sharpe (1964) and others. According to the CAPM, the equilibrium return of asset I' is related to the return of the market portfolio by the equation: . E(Rf,,) = Rh + Bi (E(Rm,l) _ Rn) (1) where Rf, is the risk free rate of interest, E(R,,,,,) is the expected return of the market portfolio, and B, is a measure of systematic risk. Under the CAPM, all residual or unsystematic risk is diversifiable and investors hold portfolios that represent linear combinations of the risk free asset and the market portfolio. A ' The authors are respectively, Assistant Professor at the University of Evansville; and Associate Professor at the University of Mississippi. They wish to thank the anonymous referee for helpful comments and suggestions. (Paper received August 1984, revisedjanuary 1985) 439

the Three Moment Version ty' CAPM Empirical tests ofthe CAPM have shown that non-linear relationships between risk as measured by beta coefficient and return may have existed in certain periods and yielded an even better fit than the traditional CAPM. This leads to the development of~a three moment CAPM, `i.e., Arditti and Levy (1975), and Krause and Litzenberger (1976). In general this version of CAPM states that investors are willing to accept lower expected return for a possibility of very high return. Thus, the exclusion ofa third moment parameter from the traditional tests would imply that the slope is biased if beta and the third moment parameter are correlated. The proposed model is as follows: E(R,-) = R/ + aB, + bG, (2) where G, is a measure of skewness of return, or E(R,~) = Rf + aB, + bK, (3) where K, is a measure of coskewness. The Arbitrage Pricing Theory Recent critisms of the CAPM, especially on the exact composition of the market portfolio, sparks interest in an alternative asset pricing model. One of these alternatives is the Arbitrage Pricing Theory (APT) developed by Ross (1976). The appeal ofthe APT comes from its contention that composition for bearing risk may be comprised of several risk premia, rather thanjust one risk premium as in the CAPM. Furthermore, unlike the CAPM, definition ofthe market portfolio is not required in the context of the APT. Under the APT, returns of risky assets are related to a /c-factor linear generating model: Ri = E; + bf,iFi +` b;,tF/= + fi (4) where IL] is the expected return on asset z`, R- is the mean zero factor common to returns of all assets; b,,, is the coefficient that measures the sensitivity of asset z' lo the movement in common factor E, and ei is a disturbance term. The e, term is assumed to reflect the random influence of information that is unrelated to other assets 1 DATA AND NATURE OF THE MARKET The first securities exchange in Thailand was established by a group of businessmen in 1962 as the Bangkok Stock Exchange (BSE). It was registered first as a limited partnership and later as a limited company. It was operated

mARKET BEHAVIOR AND CAPM IN SECURITIES EXCHANGE OF THAILAND 441 without neither interference nor support from the government. The operations of the BSE, however, were disappointing with its failure to facilitate capital market development due mainly to the economic structure and conditions of the country during that time period. However, as the number of businesses increased in the late 1960s, the market for capital was not adequately served. As a result, the Securities Exchange of Thailand (SET) was established in 1974 and the BSE discontinued. Both corporate and government securities have been traded on the SET. There are four types of corporate securities: 1) common stocks, 2) preferred stocks, 3) debentures, and 4) unit trusts or mutual funds. The number of companies initially listed on the SET was only ten companies; this number increased to 81 in 1982. Thin Market Characteristics The SET has several characteristics in common with other thin markets in that a large number of stocks are inactive. Such market thinness characteristic has several effects on market efficiency. Some individual securities are very inactive and may not react fully to changes in available information. Inactivity slows the speed of adjustment and may affect conclusion of efficiency. In addition, most companies that have their securities listed are not quite public companies. As shown in the Appendix, even the thirty most active traded securities are practically family controlled companies. Inactivity coupled with the fact that information is not readily available may enable market participants to be able to manipulate trading. Consequently, information available only to insiders may also be used to generate abnormal returns. Thus, in general, the SET appears to be less efficient than most other stock markets. Special problems may also exist because of the lack of trading for some securities in that when the market is moving, prices ofthese infrequently traded securities do not promptly reflect the new market level, A major source of potential bias is that the month-end quotes (used in this study) may not represent the outcomes oftransactions on the last day of the month. As a result, part of a securitys actual return for any month may be reflected in the following months measured return. This results in market returns constructed from such security prices being biased with a positive serial correlation induced into returns of these infrequently traded securities. Such implies that the estimated variance and covariance will be positively related to trading frequency. Since the mean beta of all securities is unity, infrequently traded securities have estimated_ betas which 'are biased downward, while the frequently traded securities betas are upward biased. This problem can be minimized by employing a special procedure to estimate beta coefficients developed by Dimson (1979) and others. In order for the measure of security return to be matched with the corresponding months market return, the previous months market return is included in the beta estimation model:

442 SAREEWIWATTHANA AND MALONE RL, = a + b,R,,,_, + b2R,,|,_, + ei (5) where RL, = security excess return in time period l, R,,,', = market excess return in time period t, and R,,,_,_, = market excess return in time period I- 1. \ The addition ofthe lagged independent variable does not substantially affect the statistical properties ofthe model and may reduce the residual variation (Ibbotson, 1975). Since the market returns are independent for different time periods, a model in equation (5) will not exhibit multicollinearity. The estimated beta of security z' can then be obtained by summing the lagged and unlagged betas. The Data The thirty most active securities whose prices are quoted continuously on the Securities Exchange of Thailand during December 1978 through November 1982 are selected for analysis. Name; industry, and percentage of stocks outstanding controlled by major stockholders are reported in Appendix A. Monthly returns are computed after adjusting for stock dividends and splits as follows; Rn = (Dig 'l' HJ ' R11-1)/P111-1 where DL, = dividend per share of the stock z' paid during month t, and PL, = price per share of the stock z' at the end of month l. Estimates of market returns are based on the weighted average of all the monthly returns using market value as weights. The risk free rate used in this study is the 180 day Thai treasury bill rate. STATISTICAL ANALYSIS AND RESULTS The Fama-MacBeth approach is utilized. Total risk, S(R,); skewness, G,-; coskewness, Kf; beta coefficient, B;; and unsystematic risk, S(e;) are computed using thirty monthly returns. For the next six months, these variables are used as proxies for ex ante variables, During the same six-month period, the mean rate of return is computed. The iterative procedure is employed by dropping the first monthly return and adding the next monthly return. Thirteen testing periods are generated for subsequent analysis. Cross-sectional regressions are performed by regressing beta against the mean return as follows:Ri=a+bBi+ei (6) where R; = mean of six monthly rates of return. All of the beta coefficients in Table 1 are significant at the 0.1 level except one (period nine) and nine of them are significant at the 0.01 level. These

MARKET BEHAVIOR AND CAPM IN SECURITIES EXCHANGE OF THAILAND 443 Table 1 Estimation ofthe Beta - Return Relationship R, = a + (JB,Where R, is the mean ofsix monthly returns B, is the infrequently traded estimated beta Period a I-value b I-value R2 1 0.0218 1.4279 0.0006 2.2287 0.1507 2 0.0182 2.1287" 0.0008 2.2070 0,1482 3 0.0143 1.7136" 0.0002 2.704-2' 0.1594 4 -0.0004 0.0529 0.0011 1.7674-" 0.1004 5 0.01856 1.6764 0.0012 2.1079 0.1365 6 0.0187 0.0588 0.0002 1.9906' 0.1239 7 0.0140 0.2637 0.0015 2.1810' 0.1452 8 - 0.0064 1.6388 0.0019 1.4-767' 0.0723 9 0.0075 1.7198" 0.0028 1.5934 0.0827 10 0.0135 2.5615" 0.0008 1.5011" 0.0723 11 0.0165 2.4741*" 0.0017 1.6455' 0.0893 12 0.0222 3.1329"" 0.0022 2.6747' 0.2026 13 0.0197 3.6655"" 0.0007 2.1249' 0.1389 Average 0.0137 1.4716 0.0008 1.7424 0.1249 Significant at 0.1 level " Significant at 0.01 level results indicate that, in general, beta seems to be a good measure of systematic risk and also that it is positively related to return. Under the CAPM, the intercept term in equation (6) should be equal to the risk free rate prevailing in the market during the time period tested and the slope term should be equal to the market risk premium. However, as presented in Table 1, the empirical intercepts are greater than the risk free rate in ten out ofthirteen periods. The empirical slopes are less than the theoretical slopes in nine out of thirteen periods. The results are consistent with empirical findings in other countries, i.e., Black, Jensen, and Scholes (1972), Blume and Friend (1973), and Fama and MacBeth (1973). A possible explanation is that there is no real risk free rate of return. An alternative approach for the risk free rate would be a return from a zero beta portfolio. The latter should be greater than a theoretical risk free rate of return. As pointed out by Miller and Scholes (1972), an inappropriate functional form in the specification of the risk-return relationship might bias the crosssectional test. In order to test for the non-linearity in the relationship, a generalized functional form is employed. Following Box and Cox (1964), Zarembka (1968), and Lee (1977), a functional form specification ofthe risk-return relationship is defined as

444 SAREEWIWATTHANA AND MALONE Rf = a + bB," (7) where /l. is the functional form parameter to be estimated. The relationship reduces to the linear form when /1 is equal to one. In other words, equation (7) includes the linear relationship form as a special case and provides a generalized functional form. . In order to allow equation (7) to be continuous at /l = 0 and stochastic, the transformation procedures should be employed as Rf = a' + bB_fl) + e,where Rf = (Rf_,)/J., Bra) " (Bi-/)/'11 a == *(a+b)-1]/1, and ei ~ N(0, S,). Using the maximum likelihood method, a maximum logarithmic function for determining the functional form is Lmax (2) = ~ nlog 51(1) + (A - 1) X log IT, + const. (8) where n -= sample size, S,(}.) = estimated regression residual standard error. The optimum value ofl is obtained from the value of). that maximizes the logarithmic likelihood. Following the likelihood ratio method, an approximate confidence for it is Lmax(}'i) _ Lmas<(/1) < f* ><2(L) where L is the level of significance. In this study, however, the transformation procedure is modified using the Box and Tidwell (1964) technique as R,=a+bBf. _ (9) As shown in Table 2, the null hypothesis can be rejected at the 0.01 level in three periods and at the 0.1 level in four periods. The evidence implies that the hypothesis ofa linear relationship between beta and return is still inconclusive for the SET. In order to test the hypothesis that beta is a complete measure of risk, the following regression equation is tested: R, = a + bE, + cS(e,) + IL (10) where S(ei) represents unsystematic risk of security i. As reported in Table 3, the beta coefficient is significant at the 0.1 level in eleven periods with nine periods significant at the 0.01 level. The unsystematic risk measures are significant at the 0.1 level in all periods with ten periods significant at the 0.01 level. Perhaps this implies that the hypothesis of beta as a complete measure of risk

MARKET BEHAVIOR AND CAPM IN SECURITIES EXCHANGE OF THAILAND 445 Table 2 Estimation of /1 of the Functional Form for the Beta - Return Relationship R. =G+ 115.1 Where R, is the mean ofsix monthly returns B, is the infrequently traded estimated beta Peliod Estimated Critical Region Critical Region at 0.1 level at 0.01 level 1 0.6403 0.274~ 1.018 0.094-1.198 2 0.8732 0.771 - 1.004 0.622- 1.157 3 0.8165 0.618-1.054 0.414- 1.259 '1- 1.1325 0.773- 1.437 0.584-1.621 5 0.7349 0.458-1.017 0.241-1.214 5 0.8780 0.537-1.203 0.291 -1.454 7 0.7915 0.511-1.040 0.321-1.248 8 0.4352 0.320-0,561 0.182-0.700 9 2.4824 2.210-2.584 2.077-2.713 10 1.5890 1.258-1.852 1.077-2.025 11 0.7432 0.620-0.873 0.449-1.294 12 0.8743 0.641-1.126 0.476-1.294 13 0.7932 0.478-1.112 0.350-1.239 Table 3 Estimation ofthe Risk - Return Relationship R, = a + bB, + cS(,) Where R, is the mean of six monthly returns B, is the infrequently traded estimated beta S(e,) is the unsystematic risk measure Period a I-ratio b I-ratio c I-ratio F I? 1 -0.0253 -2.6534" 0.0007 2.4-122" 0.0059 2.1819" 3.47" 0.1767 2 -0.0191 -1.6370' 0.0003 2.0438" 0.0021 2.050l" 2.44' 0.1217 3 ~0.0l17 - 1.0313 0.0010 2.3562" 0.0179 1.7985" 3.59" 0.1880 4 0.0206 0.0553 0.0008 1.84-10 0.0111 1.5166' 2.84" 0.1425 5 0.0222 1.6816 0.0012 l.7614' 0.0177 1.482' 2.78 0.1411 6 0.0244 2.0293" 0.0023 2.2317" 0.0051 2.1076' 6.84" 0.3128 7 0.0281 1.9364" 0.0034 3.4956 0.0024 3.6988" 11.94" 0.4451 8 0.0264 1.8233" 0.0023 2.1981" 0.0041 1.7598" 1.88 0.0907 9 0.0280 1.8655" 0.0014 1.1405 0.0009 1.7989 1.65 0.0777 10 0.0366 3.1266" 0.0007 2.2194' 0.0094 1.9607" 2.96" 0.1508 11 0.0016 2.0044" 0.0009 0.6829 0.0079 1.4320' 3.92" 0.1902 12 0.0279 2.7319" 0.0013 3.l2B6" 0.0075 2.8675" 7.89" 0.3530 13 0.0214 4.1480" 0.0015 2.9014" 0.0057 3.1884" 6.55" 0.3023 Average 0.0169 1.2712 0.0012 2.0710 0.0055 2.0030 4.46 0.1902

' Significant at 0.1 level Significant at 0.01 level 446 SAREEWIWATTHANA AND MALONE can tentatively be rejected and that unsystematic risk appears to be a significant determinant of return. To support this contention, the total risk, represented by the standard deviation of return, is regressed on return to see how significant the relationship is. R, = a + bS(R}) + 2, (11) where S(R,) represents total risk ofsecurity z`. As reported in Table 4, the results show that in all thirteen periods S(R,) coefficients are significant at the 0.1 level with eleven significant at the 0.01 level. The R-Squares from equation (11) are greater than that of equation (6) in twelve out of thirteen periods. Based on these results, it is logical to conclude that the hypothesis of beta as a complete measure of risk can be rejected. The return in the SET appeared to be more closely related to total risk than to the beta coefficient. Table 4 Estimation of the Standard Deviation - Return Relationship = a + b S(R,-) Where R, is the mean of siic monthly returns S(R,) is the standard deviation of return R, Period a t-value b l-value R2 1 -0.0041 3.2615" 0.3708 2.7083"' 0.2076 2 -0.0200 2.4469* 0.3990 2.4568" 0.1773 3 -0.0211 L7560" 0.3359 1.8B51" 0.1368 4 -0.0076 0.6743 0.2835 1.8851" 0.1126 5 0.0211 1.0928 0.0510 2.944" 0.2364 6 0.0228 1.1958 0.0164 2.3787" 0.2017 7 0.0160 1.6457' 0.0186 2.0795" 0.1528 8 0.0097 0.8556 0.0081 1.6809' 0.0849 9 0.0215 L5380' 0.2788 1.5015' 0.0745 10 0.0108 2.7085* 0.0179 1.7985"' 0.1034 11 0.0117 2.2918*' 0.1125 3.4632" 0.2999 12 0.0242 3.3931" 0.0174 2.6768 0.2035 13 0.0255 2.0654 0.0213 3.8732 0.3421 Average 0.0098 0.6652 0.1057 2.2191 0.1795 Significant at 0.1 level " Significant at 0.01 level A possible explanation is that investors hold inadequately diversified portfolios, thus the unsystematic risk of securities contributes to portfolio risk and investors with risk aversion may require compensation in the form of higher expected return for unsystematic risk and consequently, for total risk. Inadequately diversified portfolios may be held because of transaction costs, information costs, or heterogeneous expectations in risk and return. In addition, the

MARKET BEHAVIOR AND CAPM IN SECURITIES EXCHANGE OF THAILAND 447 SET appears to be a market that is dominated by small investors who hold single or a few securities rather than institutions or large investors who hold portfolios. Total risk or variation in return may be a better measure ofrisk than the beta coefficient. Yet, the observed relationship may also result from the correlation of a measure of unsystematic risk with a missing variable where the missing variable is a significant determinant of return. One possible missing variable is skewness. Consequently, the hypothesis that skewness or coskewness is a relevant pricing parameter is tested by separately adding measures of skewness and coskewness to the traditional CAPM. R; = a + bBi -1- CG, + ei (12) where G, = 2(R,|,-E.)/[z<R,,,-z?.)2+2 R, = rate of return from asset i, R, = ZR,/n. R, = a + (JB. + CK, + e, (13) where Ki = 2(Rm,,-1?m) (R,._,-E,)/2(Rm,,-1?,,)3 Rm = return from the market portfolio, Rim = ZR,"/n. Results from the SET (Tables 5 and 6) appear to be consistent with the three moment version of the CAPM. In equation (12), the beta coefficients are Table 5 Estimation of the Beta, Skewness and Return Relationship Ri = a + bBf + cG,~ Where R, is the mean of six monthly returns B; is the infrequently traded estimated beta G; is the skewness measure Period a l-value b I-value c I-value F-value R2 1 -0.0169 -2.3309 0.0019 1.5257 0.0050 2.1631 4.68 0.2292 2 - 0.0117 - 1.4000 0.0026 1.4089 0.0024 2.4568 6.04 0.2830 3 - 0.0774 - 2.5456" 0.0116 2.0528" 0.0094 2.1064" 4.44" 0.2208 4 0.0727 2.0824" 0.0312 3.2494-' 0.0047 3.2494 13.93 0.4927 5 0.0316 1.9720" 0.0219 1.3773 0.0253 1.7342 3.45 0.1714 6 0.0227 0.6895 0.0319 1.3821 0.0131 2.2318 2.27 0.1130 7 0.0211 1.0250 0.0098 2.7005 0.0014 0.1388 4.64 0.2290 8 0.0005 0.0603 0.0127 1.6733 0.0188 1.5015 2.25 0.1115 9 0.0132 0.4713 - 0.0218 -1.3376' 0.0083 0.5712 2.08 0.1029 10 -0.0271 -0.9205 -0.0170 -0.1065 0.951 1.0227 0.82 0.0236 11 0.0456 2.0654" 0.0099 1.0465 0.0098 2.6733 5.94 0.3150 12 0.0352 3.0118 0.0221 2.5740 0.0143 3.1544 21.45 0.6183 13 0.0417 3.0683 0.0197 1.4322 0.0123 3.5543 15.64 0.5218 Average 0.0116 1.4956 0.0163 1.4568 0.0073 1.7977 6.74 0.2634 ' Significant at 0.1 level " Signi1icantat0.01 level

448 SAREEWIWATTHANA AND MALONE Table 6 Estimation of the Beta, Coskewness and Return Relationship Ri = a + bB,< + cK, Where R; is the mean of six monthly returns B, is the infrequently traded estimated beta K, is the coskewness measure Period a I-value b I-value c I-value F-value fl? 1 -0.0283 - L3240' 0.0022 1.3276' 0.0064 1.0177 3.11" 0.1587 2 -0.0103 -1.2315 0.0098 l.3802 -0.0090 2.4468 4.35" 0.2171 3 -0.0774 -2.5456" 0.0112 1.3254 -0.0141 1.6067 3.58" 0.1804 4 0.0012 0.1503 0.0123 1.43l7' - 0.0007 0.2334 1.38 0.0603 5 0.0074 0.8314 0.0212 0.3160 - 0.0078 2.1409" 3.23" 0.1642 6 0.0113 1.3971 0.0091 1.4267' - 0.0054 1.8441 2.12 0.1047 7 0.0225 1.1524 -0.0110 -2.7033" -0.0122 1.5768 4.54" 0.2248 B 0.0321 1.8694 0.0174 1.8976 - 0.0038 2.2496 5.73" 0.2727 9 0.0129 0.5016 - 0.0104 - 1.0363 0.0082 0.9903 2.46' 0.1238 10 0.0333 2.2900 0.0205 1.3956' - 0.0017 0.4377 0.89 0.0263 11 0.0359 1.5016 0.0198 l.6065' -0.0010 2.2143 5.56" 0.2665 12 0.0360 3.1618 0.0106 2.1894' -0.0112 2.7956 6.98" 0.3166 13 0.0258 1.5678 0.0097 1.4125' -0.0012 2.1948 4.34" 0.2170 Avcrigt 0.0079 0.7168 0.0080 0.8294 - 0.0036 - 1.4410 3.40 0.1640 Significant at 0.1 level ' Significant at 0.01 level significant- at the 0.1 level in ten periods with four periods significant at the 0.01 level. The skewness coefficients are significant at the 0.1 level in twelve periods with ten periods significant at the 0.01 level. Compared to equation (6), adjusted R-Squares are greater under equation (12) in eleven out of thirteen periods. The evidence indicates that skewness may be a relevant parameter in determ;ning return. This is consistent with the empirical evidence found by Arditti and Levy (1975) for the New York Stock Exchange. In equation (13), the beta coefficients are significant at the 0.1 level in ten periods with nine periods significant at the 0.01 level. The coskewness coefficients are significant at the O;1"level in ten periods with nine periods significant at the 0.01 level. Compared to equation (6), the coskewness model has a greater adjusted R-Square in ten out of thirteen periods. It appears that coskewness is a relevant determinant of return. Since both skewness and coskewness coefficients are significant, the effort is made to identify the more appropriate one. Since the adjusted R-Squares from the skewness model are greater in ten out of' thirteen periods, it is selected as a better variable. Thus it appears that the three moment version of the CAPM fits the SET quite well, indicating that in addition to aversion to risk, investors in the SET have a preference for positive skewness.

The Arbitrage Pricing Theory (APT) is used to test the risk-return relation~ ship. The 36 monthly rates of return on securities (from December 1978 to LJ

MARKET BEHAVIOR AND CAPM IN SECURITIES EXCHANGE OF THAILAND 44-9 Table 7 Regressions of Excess Returns on Factor Loadings One Factor Model ExRi = a + -0.0114 0.14-58 (~ 03555) (3.0769) * R2 = 0.2527 F~value = 9.47" Two Factor Model ExR,- = a + bjn- + cF2_,0.0359 0.1463 - 0.1184 (13084) (3.3516)'* (-2.4-193) R2 =- 0.3663 F-value = 8.58" Three Factor Model ExR, == a + bF,_,~ + cF2_, + dF3_|~ 0.0167 0.0983 - 0.1334 0.1034 (0.5325) (2.1702) (- 3.9055)* (1.7052)' 1? = 0.3723 F-value = 6.16" Four Factor Model ExRi = a + bF,_,~ + cF.2_i + dF3_, +, eF4',0.0170 0.1617 -0.0673 0.0604 0.0727 _ (0.6663) ' (3_4402)~~ (~1.7274)' (1.72s5)' (O.973O) E -= 0.3997 F-value = 5.36" ExR; - Excess return ofthe mean of six monthly returns above the risk free rate Fm; - Factor loading on factor 1' ' Significant at 0.1 level " Significant at 0.01 level \ May 1982) are analyzed and a number of common factors is determined. A Chi-Square test is used to signal the adequacy of common factors. The null hypothesis of four common factors cannot be rejected, indicating a sufficient number of common factors at the 0.1 level of significance. It thus appears that four common factors may be the determinants of return in the SET. CrossSectional regression is then used to evaluate the significance of these four common factors. The mean of six monthly excess returns over the period of_]une 1982 to November 1982 is used as an independent variable in the following regression model.

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