Explaining the time series of stock returns

Abstract

Abstract: Objective: In this paper, we test and compare the explanatory power of the two asset pricing models: the conventional CAPM and the empirical Fama and French three-factor model (1993) in the Moroccan stock market. Method: According to the Fama and French (1993) methodology, we analyze monthly data covering the sample period from July 2012 to June 2020. Results: The main findings support the superiority of the Fama and French three-factor model. The mimic risk factors pertained to the size and the book-to-market ratio have a significant role in explaining the Moroccan returns. Moreover, results show the existence of weak value effect but significant size effect. Despite the preeminence of the Fama and French model in describing the time-series of sock returns, the model leaves an unexplained fraction of the variation of Moroccan stock returns. Originality/Relevance: Our study is the first to compare the two popular models in the financial literature in the Moroccan stock which is an emerging market. Thus, our study corroborates others studies conducted in emerging markets and confirms the hypothesis that the characteristics of those markets impact the explanatory power of asset pricing models.

Keywords

• CAPM
• Fama and French three-factor model (1993)
• Moroccan market
• time series data