A Three-Factor Model and Excess Return in an Emerging Market: A Case Study of Listed Companies on Tehran Stock Exchange (TSE)
Published: 2017
Author(s) Name: Morteza Hashemi, Abbasali Pouraghajan |
Author(s) Affiliation: Dept. of Mgt. and Accounting, Islamic Azad Univ., Scie. and Research Branch, Tehran-Mazandaran, Iran
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Abstract
The primary function of an efficient and deep capital market is to provide a context for supply of highquality
and transparent information and to create reasonable liquidity by eliminating information asymmetry, minimising
transaction costs, and speeding up transactions. In this research, a three-factor model is proposed based on which the
effect (the explanatory power) of three variables market risk (beta), disclosed accounting information quality, and stock
liquidity on stock return is investigated. Using time series method, the financial information of 72 TSE-listed companies
over a 7-year period (2007-2013) was examined. The stock excess return was found to be significantly associated with
market excess return, stock liquidity and accounting information quality. The results, in addition, indicated higher
explanatory power of the 3-factor model (beta, information quality, and liquidity) relative to the CAPM single-factor
model and the 2-factor model (considering beta and liquidity) in predicting the excess return on TSE.
Keywords: Information Quality, Liquidity, Beta, Information Asymmetry
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