A multifactor model explanation of the cross-section of expected stock returns: Evidence from Indonesia, Singapore and Taiwan

There is growing acceptance in financial economics that the beta of the Sharpe (1964), Lintner (1965) and Black (1972) Capital Asset Pricing Model (CAPM) is lacking in cross-sectional explanatory power. This paper examines the two most commonly used additional explanatory factors, size and hook to market equity in three Asia-Pacific markets where little evidence exists as to their applicability in explaining the cross-sectional of stock returns. This paper tests for evidence of multifactor risk premia from markets outside the US. We find that the overall market factor is highly significant in all the markets and the magnitude of significance of the other two factors (size and book to market equity) varies across countries. We also reject the claim that the multifactor model findings can be explained by the turn of the year effect. At a minimum, these factors do a reasonable job in explaining the variation in security returns.