Do Asset Pricing Models Explain Size, Value, Momentum and Liquidity Effects? The Case of an Emerging Stock Market

Abstract

This article examines whether the alternative asset pricing models and more specifically the liquidity-augmented multifactor models can explain the effect of size, value, momentum and liquidity on cross section of stock returns in India during September 1995 to March 2011. We employ time series and panel data methodology to carry out the analysis. Our findings suggest that the value and liquidity effects are often explained, but the explanatory power of size and short-run past return or momentum effect remain consistent irrespective of alternative asset pricing models risk adjustment process. The liquidity-augmented multifactor models are found to have better explanatory power than to the other alternative multifactor models. The relative performance of liquidity-augmented multifactor modes for capturing the role of firm characteristics on stock returns varies across the individual firms’ liquidity sensitivity and the aggregate market liquidity conditions. JEL Classification: G11, G12, G14, G15