Adjusted Capital Asset Pricing Models (CAPMs) with Respect to the Magnet Effect Factor (MEF) Caused by the Range of Stock Price Fluctuations

Abstract

AbstractThe aim of this study was to introduce the Magnet Effect Factor (MEF) caused by the range of stock price fluctuations as a risk premium factor in the Capital Asset Pricing Model (CAPM) and the multi-factor models of Fama and French. To answer the research questions, the information of 120 firms listed on Tehran Stock Exchange (TSE) during the period of 2010-2019 was used. According to Fama and French research, monthly returns of the portfolios were utilized for analysis. Then, using the panel data regression approach and GRS test, performances of the adjusted models with MEF were compared with those of the conventional models for explaining the stock returns. The results showed that MEF was effective in pricing capital assets and the developments of the research models with this factor and formation of the corresponding adjusted models improved performances of those models in explaining the difference in stock returns. The results also revealed that the adjusted 5-factor model with the MEF had better performance compared to the adjusted 3 and 6-factor models and the adjusted CAPM with the MEF.

Keywords

• multi-factor model
• capital asset pricing
• expected return
• magnet effect factor (mef)