The trade-off between risk and return lies at the heart of modern financial theory. Over the past decade, however, the debate around the empirical support for the Sharpe-Linter-Black (SLB) model in explaining the cross-section of stock returns is intense and endless. One possible explanation for the significance of market beta is conditional effect. / Motivated by Fama and French's (1992) findings, which show that firm size and book-to-market equity ratio, but not beta, have the ability to capture cross-sectional variation in stock returns, and also inspired by Pettengill, Sundaram, and Mathur's (1995) conditional SLB model, which exhibits a positive beta-return trade-off that is conditional on the realized returns and not the expected returns, this study extends the idea of systematic conditional relationship to a number of firm-specific variables including firm size, book-to-market equity ratio (B/M), and earnings-to-price ratio (E/P). This study applies the unconditional as well as conditional SLB models to the variables used in Fama and French's empirical analysis and the primary purpose is to provide a clue to unravelling the mystery of asset pricing, especially in six important stock markets in the Pacific-Basin region, namely, Hong Kong, Korea, Malaysia, Singapore, Taiwan, and Thailand, particularly by understanding how the separation of up and down market periods has an impact on the selected variables. / Consistent with the previous results, though beta plays no role in pricing returns under unconditional framework, it revives when conditional relationship with realized returns is considered. There is evidence of a significantly positive (negative) risk premium on beta during periods of up (down) markets, supporting for the continuous use of beta as a measure of market risk. / Interestingly, while firm size is the only significant variable in explaining variation of returns in the Malaysia and Singapore markets under unconditional framework, no expected conditional size effect is found in this study. On the contrary, both B/M and E/P are likely to be factors that should be priced in the conditional market, and their conditional effects are, in general, significant in the absence of the other. This particular phenomenon is present in all markets but Taiwan. Contrary to the reported findings of stronger beta effect in down periods in the U.K. and Japan stock markets, the risk premiums on beta as well as on firm size, B/M, and E/P are, in general, symmetric across up and down markets, except for those that have significant unconditional effects; the results imply that investors in the six Pacific-Basin stock markets react virtually the same, no matter in up or down markets, to beta and to these firm-specific variables. / The above results, which are obtained from a single time-series pooling cross-sectional regression, are robust for four sorting procedures and for two proxies of the market index. In addition, the principal results are not at all sensitive to the use of two other different methodologies employed in this study. / Thesis (PhDBusinessandManagement)--University of South Australia, 2006.
| Identifer | oai:union.ndltd.org:ADTP/267318 |
| Creators | So, Simon Man Shing. |
| Source Sets | Australiasian Digital Theses Program |
| Language | English |
| Detected Language | English |
| Rights | copyright under review |
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