Profitability, Investment and Asset Pricing: Reconciling the Valuation and the q-Theory Approaches in the Thai Stock Market

Kanis Saengchote

No 124, PIER Discussion Papers from Puey Ungphakorn Institute for Economic Research

Abstract: There are several ways to motivate why profitability and investment should affect stock returns. In this paper, I investigate the valuation approach of Fama and French (2015) and the q-theory approach of Hou, Xue and Zhang (2015). While the underlying theories are different, their empirical predictions are the same. Slight differences in factor construction methods afford an opportunity to combine the features of the two models. I find that reinterpreting the q factors (with more frequent rebalancing and more layers of sorting) as Fama-French valuation factors can lead to improvement in model performance. In this modified version, the market risk, size, value, profitability and investment effects are all priced in Thailand.

Keywords: Asset Pricing Model; Factor-mimicking Portfolios (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2020-01
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