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Article

Open Access

Empirical Asset Pricing—Saudi Stylized Facts and Evidence

Author(s)

Wesam Mohamed Habib

Full-Text PDF Download XML 1074 Views

DOI:10.17265/2328-7144/2016.01.005

Affiliation(s)

Wesam Mohamed Habib, Ph.D., assistant professor of finance and university coordinator of international affairs at the University of Business and Technology, Jeddah, Kingdom of Saudi Arabia.

ABSTRACT

This paper estimates proxy specifications of a five-factor asset pricing model to produce stylized facts of the Saudi capital market and test an arbitrage pricing theory (APT) model. The data set is the panel of 20 most actively traded firms, excluding firms with negative book value of equity. The contribution to the extant literature is three-fold: (1) organizing Saudi market data based on beta and firm-specific fundamentals, namely, growth, value, accounting earnings, and equity investments; (2) conducting a parsimony analysis within the theoretical framework of APT; and (3) quantifying the information risk facing the marginal investor by decomposing earnings into cash flows and accruals and investigating respective loadings in an unrestricted version of the parsimonious specification. Proxy asset pricing specifications, though intuitively appealing, are scant due to lack of theoretical frameworks and misguided significance tests of factor loadings. Throughout, this issue is addressed by keeping the empirical analysis under describing market facts and testing an APT model. The study concludes with a significant empirical explanation that specifies average returns in terms of the covariance risk and accounting accruals.

KEYWORDS

asset pricing, factor models, APT

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