Explaining Stock Returns in Nepal: Application of Single and Multi-factor models

摘要

This paper investigates the relevance of CAPM single factor and Fama-French three factor (Fama-French) models to explain the return for cross sectional portfolios in the context of Nepalese stock market. We use stock market data and treasury bill rate over the period of August 2007 to July 2013 and estimate the factor models after correcting for the violation of classical linear regression assumptions. Our results show that in all five portfolios (B/L, B/M, B/H, S/M, S/H), three factor model has better explanatory power over CAPM. The estimations of Fame-French showed that Excess market return (ER) and Value factor are more significant than Size factor in model fitting. Finally, the study tested for the seasonality in Nepalese stock return using the dummy variable. The results showed significant seasonality effect for fiscal year end thus indicating possibility of tax loss effect in Nepalese stock market but seasonality effect on account of festival period is found to be insignificant.