Interest rate, size and book-to-market effects in Australian financial firms

Md Akhtaruzzaman, Paul Docherty and Abul Shamsuddin ()

Applied Economics, 2014, vol. 46, issue 25, 3005-3020

Abstract: The Fama-French three-factor model (1993) has been extensively used to study the pricing of nonfinancial stocks. This study provides the first examination of the pricing of Australian financial stocks using the Fama-French framework. The four-factor model (market, size, book-to-market and momentum) augmented with the level, slope and curvature of the interest rate term structure is used to examine the pricing of Australian financial stocks. The interest rate factors have not been previously considered for pricing Australian stocks within the Fama-French framework. Consistent with US evidence, we use a system-based estimation to show that the size and book-to-market factors are not priced in the cross section of the equity returns of Australian financial stocks. Momentum and term spread are priced in the equity returns of both financial and nonfinancial stocks. These findings are robust to the inclusion of control variables such as default spread, the inflation rate and a dummy variable for the global financial crisis.

Date: 2014
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DOI: 10.1080/00036846.2014.920478

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