How Well the Implementation of Carhart Model in Market Overreaction Condition? Evidence in Indonesia Stock Exchange

  • Authors

    • Ferikawita M. Sembiring
    • . .
    2018-12-03
    https://doi.org/10.14419/ijet.v7i4.38.27611
  • CAPM, Carhart Model, Fama And French's Model, Market Overreaction

  • This study aims to determine an ability of the four-factor model of Carhart in explaining the portfolio returns formed in condition of market overreaction. The four-factor model is basically a model proposed by Fama and French and then developed by Carhart which adds price momentum factor into the model. While market overreaction is a market condition caused by excessive reactions from investors when receiving information. The portfolios used are the winner and loser formed based on the returns of each portfolio to the average of the returns. Both portfolio consist are the stocks of non-financial sector in Indonesia Stock Exchange during the period July 2005 - December 2015. The data used are the Composite Stock Price Index (CSPI), stock market capitalization, book to market ratio of each shares and the difference of returns of the loser over of the winner, as an indicator of price momentum factor that formed in market overreaction condition characterized by occurance the reversal of returns.

    The results show that the four-factor model can explain the portfolio return well. Implementation of the GARCH (1,1) model to improve the accuracy of the estimation results also shows similar findings. 

     

     


     

  • References

    1. [1] Asefa, Tibebe A., Omar A. Esqueda, and Emilios C. Galariotis. “Overreaction Evidence from Large Cap. Stocks.†Review of Accounting and Finance, 2014, pp. 1-26.

      [2] Berglund, T. and J. Knif. “Accounting for The Accuracy of Beta Estimates in CAPM Tests on Assets with Time-Varying Risks.†European Financial Management, Vol. 5, No. 1, 1999, pp. 29-42.

      [3] Black, Fischer, M. C. Jensen, and Scholes. “The Capital Asset Pricing Model: Some Empirical Test.†Studies in The Theory of Capital Markets, New York: Praeger Publisher, 1972.

      [4] Bollerslev, T. “Generalized Autoregressive Conditional Heteroskedasticity.†Journal of Econometric, Vol. 31, 1986.

      [5] Bollerslev, T., R. F. Engle, and J. M. Wooldridge, “A Capital Asset Pricing Model with Time-Varying Covariances.†Journal of Political Economy, 96, 1988, pp. 116-131.

      [6] Carhart, M. “On Persistence in Mutual Fund Performanceâ€. Journal of Finance, 52 (1), 1997, pp. 57-82.

      [7] Engle, R., “Autoregressive Conditional Heteroscedasticity with Estimates of The Variance of United Kingdom Inflationâ€. Econometrica, 50, 1982.

      [8] Fama, E. F and Kenneth F. French. “Common Risk Factors in The Return on Stock and Bondsâ€. Journal of Financial Economics, Vol. 33, No. 1, 1993.

      [9] Fama, E. F and Kenneth F. French. “Size, Value, and Momentum in International Stock Returnsâ€. Journal of Financial Economics, 2012, pp. 457-472.

      [10] Fama, E. F and J. D. Macbeth. “Risk, Returns, and Equilibrium: Empirical Testâ€. Journal of Political Economy, Vol. 81, No. 3, 1973, pp. 607-636.

      [11] Ferson, W., S. Kandel and R. Stambaugh. “Tests of Asset Pricing with Time-Varying Expected Risk Premiums and Market Betasâ€. Journal of Finance, Vol. XLII, No. 2, 1987, pp. 201-220.

      [12] Lintner, J. “The Valuation of Risk Assets and The Selection of Risky Investments in Stock Portfolios and Capital Budgetsâ€. Review of Economics and Statistics, Vol. 47, No. 1, 1965, pp. 13-47.

      [13] McDonald, B. and William D. Nichols. “Nonstationarity of Beta and Test of Market Efficiencyâ€. The Journal of Financial Research, Vol. VII, 1984.

      [14] Phengpis, C., “Are Emerging Stock Market Price Indices Really Stationary?â€. Applied Financial Economics, 16, 2006, pp. 931-939.

      [15] Rosenberg, B., “The Monthly Effect in Stock Returns and Conditional Heteroskedasticityâ€. American Economist, Vol 48, No. 2, 2004.

      [16] Sembiring, Ferikawita M., Rahman, S., Effendi, N., and Sudarsono, R., “Capital Asset Pricing Model in Market Overreaction Conditions: Evidence From Indonesia Stock Exchangeâ€. Polish Journal of Management Studies, Vol. 14, No. 2, 2016, pp. 182-190.

      [17] Sembiring, Ferikawita M., Rahman, Sulaeman, Effendi, Nury, and Sudarsono, Rachmat. “Single Beta And Dual Beta Models: A Testing Of CAPM On Condition Of Market Overreactionâ€. Journal of Finance and Banking Review, 2 (3), 2017, pp. 1 – 7.

      [18] Sharpe, W. F. “A Simplified Model for Portfolio Analysisâ€. Management Science, Vol. 9, No. 2, 1963, pp. 277-293.

      [19] Vorkink, K. “Return Distributions and Improved Tests of Asset Pricing Modelsâ€. The Review of Financial Studies, Vol. 16, No. 3, 2003.

      [20] Wang, Ching-Piang, Huang-Hsi Huang, and Chi-Chuang Huang. “Momentum and Contrarian Profits Corresponding to the Coincident Economic Indicator on the Taiwan Stock Marketâ€. Emerging Markets Finance & Trade, Vol. 48, 2012, pp. 29-40.

  • Downloads

  • How to Cite

    M. Sembiring, F., & ., . (2018). How Well the Implementation of Carhart Model in Market Overreaction Condition? Evidence in Indonesia Stock Exchange. International Journal of Engineering & Technology, 7(4.38), 928-931. https://doi.org/10.14419/ijet.v7i4.38.27611