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Journal of Business Economics and
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VaR and the cross-section of expected stock returns: an emerging market evidence
Dar-Hsin Chena, Chun-Da Chenb & Su-Chen Wuc a Department of Business Administration, College of Business
National Taipei University, 151 University Rd., San Shia,
Taipei, 237 Taiwan. E-mail: b Department of Economics and Finance, College of Business,
Tennessee State University, AWC Campus, 330 10th Avenue
North, Nashville, TN, USA c Graduate Institute of Finance, National Chiao Tung
University, Hsinchu, Taiwan
Published online: 08 Jul 2014.
To cite this article: Dar-Hsin Chen, Chun-Da Chen & Su-Chen Wu (2014) VaR and the crosssection of expected stock returns: an emerging market evidence, Journal of Business Economics and Management, 15:3, 441-459, DOI: 10.3846/16111699.2012.744343
To link to this article: http://dx.doi.org/10.3846/16111699.2012.744343
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Copyright © 2014 Vilnius Gediminas Technical University (VGTU) Press Technika
Journal of Business Economics and Management
ISSN 1611-1699 print / ISSN 2029-4433 online http://www.tandfonline.com/TBEM 2014 Volume 15(3): 441–459 doi:10.3846/16111699.2012.744343
VAR AND THE CROSS-SECTION OF EXPECTED STOCK
RETURNS: AN EMERGING MARKET EVIDENCE
Dar-Hsin Chen1, Chun-Da Chen2, Su-Chen Wu3 1Department of Business Administration, College of Business National Taipei University, 151 University Rd., San Shia, Taipei, 237 Taiwan 2Department of Economics and Finance, College of Business, Tennessee State University,
AWC Campus, 330 10th Avenue North, Nashville, TN, USA 3Graduate Institute of Finance, National Chiao Tung University, Hsinchu, Taiwan
E-mails: email@example.com; firstname.lastname@example.org (corresponding author)
Received 13 September 2011; accepted 16 October 2012
Abstract. In this paper we investigate the explanatory power of the market beta, firm size, and the book-to-market ratio, as well as Value-at-Risk regarding the cross-sectional expected stock returns in a less developed stock market – Taiwan’s stock market. The main purpose is to examine whether the Value-at-Risk factor has marginal explanatory power related to the Fama-French three-factor model. The empirical results show that
Value-at-Risk can account for the average stock returns at both 1% and 5% significance levels based on cross-sectional regression analysis. Moreover, from the perspective of the time series regression, the Value-at-Risk factor can also demonstrate the variation of the stock market, especially for the larger companies in the Taiwan stock market.
Keywords: CAPM, market beta, anomalies, emerging stock market, Value-at-Risk, FamaFrench factors.
Reference to this paper should be made as follows: Chen, D.-H.; Chen, C.-D.; Wu, S.-Ch. 2014. VaR and the cross-section of expected stock returns: an emerging market evidence,
Journal of Business Economics and Management 15(3): 441–459.
JEL Classifications: G11, G12, G15.
The prominent capital asset pricing model (CAPM) of Sharpe (1964), Lintner (1965), and Black (1972) has for decades been the major framework for analyzing the cross sectional variation in expected asset returns, but theory and practice might not always match. Fama and French (1992) draw two different conclusions regarding CAPM – that is, when one allows for variations in the CAPM market β that are unrelated to size, the univariate relationship between β and the average return for 1941–1990 is weak, and β does not suffice to explain this average return. They also find no cross-sectional return-beta relationship while controlling for size and the ratio of book-to-market equity (Chan, Chui 1996).
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Several alternative risk factors have consequently been employed in the literature, for example, the size effect of Banz (1981) and Nunes et al. (2012). They finds the market value of equity (ME) and firm size provide an explanation of the cross-section of average returns. Other variables such as the book-to-market equity ratio (BE/ME) (Fama,
French 1992, 1993, 1995, and 1996; Rosenberg et al. 1985), the price/earnings ratio (Basu 1977), leverage (Bhandari 1988), Value-at-Risk (Bali, Cakici 2004), and profitability and investment patterns (Fama and French 2013) also have significant explanatory power for making clear the average expected returns. Hung et al. (2004), on the other hand, control for the sign of realized market premia and use higher order asset pricing models to test CAPM.