Browse > Article
http://dx.doi.org/10.13106/jafeb.2020.vol7.no12.605

A New Measure of Asset Pricing: Friction-Adjusted Three-Factor Model  

NURHAYATI, Immas (Fakultas Ekonomi dan Bisnis, Universitas Ibn Khaldun)
ENDRI, Endri (Graduate Program, Universitas Mercu Buana)
Publication Information
The Journal of Asian Finance, Economics and Business / v.7, no.12, 2020 , pp. 605-613 More about this Journal
Abstract
In unfrictionless markets, one measure of asset pricing is its height of friction. This study develops a three-factor model by loosening the assumptions about stocks without friction, without risk, and perfectly liquid. Friction is used as an indicator of transaction costs to be included in the model as a variable that will reduce individual profits. This approach is used to estimate return, beta and other variable for firms listed on the Indonesian Stock Exchange (IDX). To test the efficacy of friction-adjusted three-factor model, we use intraday data from July 2016 to October 2018. The sample includes all listed firms; intraday data chosen purposively from regular market are sorted by capitalization, which represents each tick size from the biggest to smallest. We run 3,065,835 intraday data of asking price, bid price, and trading price to get proportional quoted half-spread and proportional effective half-spread. We find evidence of adjusted friction on the three-factor model. High/low trading friction will cause a significant/insignificant return difference before and after adjustment. The difference in average beta that reflects market risk is able to explain the existence of trading friction, while the difference between SMB and HML in all observation periods cannot explain returns and the existence of trading friction.
Keywords
Unfrictionless Markets; Trading Friction; Adjusted Three-Factor; Transaction Cost;
Citations & Related Records
Times Cited By KSCI : 6  (Citation Analysis)
연도 인용수 순위
1 Stoll, H. R. (2000). Presidential Address: Friction. The Journal of Finance, 55(4), 1479-1514. https://doi.org/10.1111/0022-1082.00259   DOI
2 Amihud, Y., Mendelson, H., & Pedersen, L. H. (2006). Liquidity and asset prices. Foundations and Trends in Finance, 1(4), 269-364.   DOI
3 Bian, G., McAleer, M., & Wong, W. (2013). Robust estimation and forecasting of the Capital Asset Pricing Model. Annals of Financial Economics, 8(2), 1-18 Doi: 10.1142/S2010495213500073   DOI
4 Cai, C. X., Hillier, D., Hudson, R., & Keasey, K. (2008). Trading Frictions and Market Structure: An Empirical Analysis. Journal of Business Finance & Accounting, 35(3-4), 563-579. https://doi.org/10.1111/j.1468-5957.2008.02076.x   DOI
5 Chowdhry, B., & Nanda, V. (1991). Multimarket Trading and Market Liquidity. The Review of Financial Studies, 4(3), 483-511.   DOI
6 Constantinides, G. M. (1986). Capital Market Equillibrium with Transaction Cost. The Journal of Political Economy, 94(4), 842-862.   DOI
7 Demsetz, H. (1968). The Cost of Transacting. The Quarterly Journal of Economics, 82(1), 33-53.   DOI
8 Elton, E. J., Gruber, M. J., Brown, S. J., & Goetzmann, W. N. (2010). Modern Portfolio Theory and Investment Analysis. Hoboken, NJ: John Wiley & Sons.
9 Endri, E., Abidin, Z., Simanjuntak, P, T., & Nurhayati, I. (2020). Indonesian Stock Market Volatility: GARCH Model. Montenegrin Journal of Economics, 16(2), 7-17. DOI: 10.14254/1800-5845/2020.16-2.1   DOI
10 Fabozzi, F. J., Focardi S. M., & Kolm P. N. (2010). Quantitative Equity Investing. Hoboken, NJ: John Wiley & Sons.
11 Fama, E. F., & Kenneth R. F. (2015). A Five-Factor Asset Pricing Model. Journal of Financial Economics, 15(1), 1-22   DOI
12 Fama, E. F., & French, K. R. (1996). Fama_French_multifactor_explanations.pdf. Journal of Finance, 51(1), 55-84.   DOI
13 Acharya, V., & Pedersen, L. (2005). Asset pricing with liquidity risk. Journal of Financial Economics, 77(2), 375-410. https://doi.org/10.1016/j.jfineco.2004.06.007   DOI
14 Amihud, Y., Mendelson, H., Amihud, Y., & Mendelson, H. (1986). Asset pricing and the bid-ask spread. Journal of Financial Economics, 17(2), 223-249.   DOI
15 Fama, E. F., & French, K. R. (2004). The capital asset pricing model: Theory and evidence. The Journal of Economic Perspectives, 18(3), 25-46.   DOI
16 Fama, E. F., & MacBeth, J. D. (1973). Risk, Return, and Equilibrium: Empirical Tests. Journal of Political Economy, 81(3), 607-636.   DOI
17 Fama, E., & French, K. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3-56.   DOI
18 Glosten, L.R., & Harris, L.E. (1988). Estimating the components of the bid/ask spread. Journal of Financial Economics, 21, 123-142.   DOI
19 Fatmawati,. Tanjung, H., & Endri. (2020). Effect of Market Risk Premium and Exchange Rate on the Return of Jakarta Islamic Index. Global Journal of Management and Business Research: B Economics and Commerce, 5(1), 2020, 1-10.
20 Garleanu, N., & Pedersen L. (2013). Dynamic Trading with Predictable Returns and Transaction Costs. The Journal of Finance 68, 2309-2340.   DOI
21 Glosten, L. R., & Harris, L. E. (1988). Estimating The Components of Bid/Ask Spread, Journal of Financial Economics, 21(1), 123-142. https://doi.org/10.1016/0304-405X(88)90034-7   DOI
22 Huang, Y.C. (2013). Determinants of Trading Costs. In: H. K. Baker, & H. Kiymaz, (Ed.), Market Microstructure in Emerging and Developed Markets (p. 233-252). Hoboken, NJ: John Wiley & Sons.
23 Jegadeesh, N., & Titman, S. (1995). Overreaction, Delayed Reaction, and Contrarian Profits. The Review of Financial Studies, 8(4), 973-993. https://doi.org/10.1093/rfs/8.4.973   DOI
24 Khudoykulov, K., Rustam, A. S., & Khalikov, U. (2016) The relationship between the risk of the asset and its expected rate of return: a case of stock exchange market of five European countries. International Journal of Modelling and Simulation, 36(4), 107-119, DOI: 10.1080/02286203.2016.1189388   DOI
25 Lee, S., & Upneja, A. (2008). Is Capital Asset Pricing Model (CAPM) the best way to estimate cost‐of‐equity for the lodging industry? International Journal of Contemporary Hospitality Management, 20(2), 172-185. https://doi.org/10.1108/09596110810852159.   DOI
26 Merton, R. (1973). An Intertemporal Capital Asset Pricing Model. Econometrica, 41(5), 867-87.   DOI
27 Liammukda, A., Khamkong, M., Saenchan, L., & Hongsakulvasu, N. (2020). The Time-Varying Coefficient Fama - French Five Factor Model: A Case Study in the Return of Japan Portfolios. Journal of Asian Finance, Economics and Business, 7(10), 513-521. doi:10.13106/jafeb.2020.vol7.no10.513.   DOI
28 Lucas, R. E. (1978). Asset Prices in an Exchange Economy, Econometrica, 46 (6), 1429-1445.   DOI
29 Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7(1), 77-91.   DOI
30 Morgenstern, O., & Neumann, J. Von. (1944). Theory and Economic. Princeton University Press.
31 Nguyen, C. T., & Nguyen, M. H. (2019). Modeling Stock Price Volatility: Empirical Evidence from the Ho Chi Minh City Stock Exchange in Vietnam. Journal of Asian Finance, Economics and Business, 6(3), 19-26. doi:10.13106/jafeb.2019.vol6.no3.19.   DOI
32 Pojanavatee, S. (2020). Tests of a Four-Factor Asset Pricing Model: The Stock Exchange of Thailand. Journal of Asian Finance, Economics and Business, 7(9), 117-123. doi:10.13106/jafeb.2020.vol7.no9.117.   DOI
33 Razak, A., Nurfitriana, F. V., Wana, D., Ramli, R., Umar, I., & Endri, E. (2020). The Effects of Financial Performance on Stock Returns: Evidence of Machine and Heavy Equipment Companies in Indonesia. Research in World Economy, 11(6), 131-138. doi:10.5430/rwe.v11n6p131.   DOI
34 Ross, S. (1976). The arbitrage theory of capital asset pricing. Journal of Economic Theory, 13(3), 341-360.   DOI
35 Sharpe, W. F. (1964). Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. The Journal of Finance, 19(3), 425. https://doi.org/10.2307/2977928   DOI