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Applying exogenous variables and regime switching to multi-factor models on equity indices

100%
Sakowski P., Ślepaczuk R., Wywiał M.
Ekonomia. Rynek, Gospodarka, Społeczeństwo
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2016
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issue 47
79-121
EN
This article aims to extend the evaluation of classic multi-factor models of Carhart (1997) and to expand analysis performed in Sakowski, Ślepaczuk and Wywiał (2015). We test several modifications of these models to take into account different dynamics of equity excess returns between emerging and developed equity indices. Proposed extensions include volatility regime switching mechanism and three new risk factors. Additionally, we introduce common- and country-specific variables in order to control for global risk. Instead of individual stocks, we use weekly data of 81 world investable equity indices in the period of 2000−2015. We find substantial differences between results for classical models on single stocks and models evaluated for equity indices. Moreover, we observe solid discrepancies between results for developed and emerging markets. Introducing new risk factors and additional variables increase explanatory power of models.
2
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Liquidity and solvency of a company and the rate of return – an analysis of the Warsaw Stock Exchange

88%
Zalewska J., Nehrebecka N.
Central European Economic Journal
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2019
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vol. 6
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issue 53
EN
The purpose of the article is to analyse the impact of various financial ratios used to evaluate a company’s liquidity and solvency on the rates of return on the shares of companies listed on the Warsaw Stock Exchange. In the context of developing countries, the relationship between liquidity and solvency on the one hand and the return on equity on the other is still not clear. Poland is the most economically developed country in Central and Eastern Europe. A thorough analysis is necessary to take appropriate action and introduce adequate regulations in the country, as well as to create the foundation for researching other economies in this region. In addition, this article includes new estimators that have not yet been taken into account but that may affect the rates of return, which will contribute to the literature on the subject and to the development of knowledge on the volatility of returns on shares. In the study, we have calculated the time-varying beta coefficients of the capital asset pricing model (CAPM) model and analysed portfolios based on three liquidity ratios and four solvency ratios, which were computed using the CAPM, Fama–French and Carhart models. The empirical study described in the article focuses on companies listed on the Warsaw Stock Exchange in the period from 1 January 1999 to 30 June 2013. Regressions were estimated by the least-squares method and by quantile regression. Based on the results, it was found that listed companies at risk of bankruptcy are able to meet their short-term liabilities. Liquidity and solvency measured by financial ratios significantly affect the sensitivity of the rate of return on shares to the risk factors expressed in the CAPM, Fama––French and Carhart models.
3

Zastosowanie modelu trzyczynnikowego w inwestowaniu na Giełdzie Papierów Wartościowych w Warszawie

88%
Schmidt B.
Zeszyty Naukowe Uniwersytetu Ekonomicznego w Krakowie
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2013
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issue 907
157-169
EN
Since the 1970s numerous papers have presented the results of analyses conducted on western capital markets. They have provided a great deal of evidence that CAPM is not able to deliver valuable predictions about future stock returns. That is why so many attempts have been made to develop a better pricing model, one of which is Fama and French’s three-factor model. This article analyses the extent to which this model can predict stock returns on the Warsaw Stock Exchange (the WSE). The analysis shows that the three-factor model does not deliver accurate predictions because it does not take into account all the essential factors that determine returns on the WSE. Further surveys should be conducted to identify these factors.
4
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Can we invest on the basis of equity risk premia and risk factors from multi-factor models ?

75%
Pawel S., Robert Ś., Mateusz W.
Economics and Business Review
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2016
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vol. 2(16)
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issue 3
78-98
EN
We examine two investment algorithms built on the weekly data of world equity indices for emerging and developed countries in the period 2000-2015. We create seven risk factors using additional data about market capitalization, book value, country GDP and betas of equity indices. The first strategy utilizes the theoretical value of equity risk premium from the seven-factor Markov-switching model with exogenous variables. We compare theoretical with the realized equity risk premium for a given index to undertake the buy/sell decisions. The second algorithm works only on eight risk factors and applies them as input variables to Markowitz models with alternative optimization criteria. Finally we note that the impact of risk factors on the final results of investment strategy is much more important than the selection of a particular econometric model in order to correctly evaluate the equity risk premium.
5
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CROSS-SECTIONAL RETURNS FROM DIVERSE PORTFOLIO OF EQUITY INDICES WITH RISK PREMIA EMBEDDED

63%
Sakowski P., Ślepaczuk R., Wywiał M.
Metody Ilościowe w Badaniach Ekonomicznych
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2015
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vol. 16
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issue 2
89-101
EN
The main purpose of this article is to extend evaluation of classic Fama-French and Carhart model for global equity indices. We intend to check the robustness of models results when used for a wide set of equity indices instead of single stocks for the given country. Such modification enables us to estimate equity risk premium for a single country. However, it requires several amendments to the proposed methodology for single stocks. Our empirical evidence reveals important differences between the conventional models estimated on single stocks, either international or US-only, and models incorporating whole markets. Our novel approach shows that the divergence between indices of the developed countries and those of emerging markets is still persistent. Additionally, research on weekly data for equity indices presents rationale for explanation of equity risk premia differences between variously sorted portfolios.
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