The effect of leverage mimicking portfolios in explaining stock returns variations

Sivaprasad, S. and Muradoglu, Y.G. 2013. The effect of leverage mimicking portfolios in explaining stock returns variations. Studies in Economics and Finance. 30 (2), pp. 94-107.

TitleThe effect of leverage mimicking portfolios in explaining stock returns variations
AuthorsSivaprasad, S. and Muradoglu, Y.G.
Abstract

Purpose – The purpose of this paper is to explore the effect of leverage mimicking factor portfolios in explaining stock return variations. This paper broadens the focus of the current asset pricing literature by forming portfolios mimicking the leverage factor.

Design/methodology/approach – Following Fama and French's and Carhart's procedure in forming size, book-to-market and momentum mimicking portfolios, the authors of this paper form leverage mimicking factor portfolios to explain stock returns. A five factor model is constructed that explains the variations in stock returns better relative to the other asset pricing models including the Fama-French-Carhart four factor model.

Findings – The findings indicate that the leverage mimicking portfolio helps to explain stock return variations better relative to the other asset pricing models including the Fama-French-Carhart four factor model. Results are robust to other risk factors.

Research limitations/implications – The results lead us to explore further avenues in using other risk factors in asset pricing such as future work to consider other cross-sectional attributes such as the stochastic behaviour of earnings or profitability that might also produce common variation in stock returns. There may be other risk factors that carry a premium and thus can be used for asset pricing.

Practical implications – The paper's findings are important in fund management when selecting or evaluating portfolio performance. The authors introduce an additional factor that has a sound theoretical appeal and show that leverage mimicking factor portfolios provide additional information in pricing assets, both in the cross section of all shares and in different sectors.

Originality/value – To the best of the authors' knowledge this is the first study of the effect of leverage mimicking factor portfolios in explaining stock return variations.

JournalStudies in Economics and Finance
Journal citation30 (2), pp. 94-107
ISSN1086-7376
Year2013
PublisherEmerald
Digital Object Identifier (DOI)doi:10.1108/10867371311325417
Publication dates
Published2013

Related outputs

Enhancing Momentum Investment Strategy Using Leverage
Forner,C., Muradoglu, Y.G. and Sivaprasad, S. 2018. Enhancing Momentum Investment Strategy Using Leverage. Journal of Forecasting. 37 (5), pp. 573-588.

The Impact of Internationalization on Zero Leverage: Evidence from the UK
Chatzivgeri, E., Dontis-Charitos, P. and Sivaprasad, S. 2016. The Impact of Internationalization on Zero Leverage: Evidence from the UK. British Accounting and Finance Association Annual Conference 2016. Bath, United Kingdom 21 - 23 Mar 2016

Home bias persistence in foreign direct investments
Levis, M., Muradoglu, Y.G. and Vasileva, K. 2016. Home bias persistence in foreign direct investments. The European Journal of Finance. 22 (8-9), pp. 782-802.

The Determinants of Zero Leverage: Evidence from Multinational Firms
Chatzivgeri, E., Sivaprasad, S. and Dontis-Charitos, P. 2015. The Determinants of Zero Leverage: Evidence from Multinational Firms. International Finance and Banking Society Corporate Finance Conference. Saïd Business School, University of Oxford, United Kingdom, 12 - 13 Sep 2015

The Determinants of Zero Leverage: Evidence from Multinational Firms
Chatzivgeri, E., Sivaprasad, S. and Dontis-Charitos, P. 2015. The Determinants of Zero Leverage: Evidence from Multinational Firms. 5th International Conference of the Financial Engineering and Banking Society. Nantes, France 11 - 13 Jun 2015

The value effects of changes in leverage: Evidence from the Travel and Leisure sector
Van Dellen, S., Sivaprasad, S. and Bas, T. 2015. The value effects of changes in leverage: Evidence from the Travel and Leisure sector. 22nd Annual Conference of the Multinational Finance Society. Halkidiki, Greece 28 Jun - 01 Jul 2015

An Investment Strategy Based on Leverage: Evidence from BSE 500
Sivaprasad, S. and D’Mello, L. 2015. An Investment Strategy Based on Leverage: Evidence from BSE 500. Journal of Emerging Market Finance. 14 (3), pp. 210-238.

How does a firm's capital structure affect stock performance?
Sivaprasad, S., Adami, R., Gough, O. and Muradoglu, Y.G. 2015. How does a firm's capital structure affect stock performance? Frontiers in Finance and Economics. 12 (1), pp. 1-31.

An empirical analysis of the performance of pension funds: evidence from UK
Sivaprasad, S., Adami, R., Gough, O. and Mukherjee, S. 2014. An empirical analysis of the performance of pension funds: evidence from UK. Studies in Economics and Finance. 31 (2), pp. 141-155.

The impact of leverage on stock returns in the hospitality sector: evidence from the UK
Muradoglu, Y.G. and Sivaprasad, S. 2014. The impact of leverage on stock returns in the hospitality sector: evidence from the UK. Tourism Analysis. 19 (2), pp. 161-171.

Are there return and volatility spillovers from major bank stocks to the national stock market in the UK?
Dontis-Charitos, P., Gough, O., Nowman, K.B. and Sivaprasad, S. 2013. Are there return and volatility spillovers from major bank stocks to the national stock market in the UK? in: Jeon, B.N. and Olivero, M.P. (ed.) Global Banking, Financial Markets and Crises (International Finance Review, Vol. 14) Emerald. pp. 243 - 268

Continuous and discrete time modelling of spillovers in equity and bond markets
Dontis-Charitos, P., Gough, O., Nowman, K.B. and Sivaprasad, S. 2013. Continuous and discrete time modelling of spillovers in equity and bond markets. International Journal of Bonds and Derivatives. 1 (1), pp. 54-87.

Capital structure and abnormal returns
Sivaprasad, S. and Muradoglu, Y.G. 2012. Capital structure and abnormal returns. International Business Review. 21 (3), pp. 328-341.

Using firm level leverage as an investment strategy
Muradoglu, Y.G. and Sivaprasad, S. 2012. Using firm level leverage as an investment strategy. Journal of Forecasting. 31 (3), pp. 260-279.

Capital structure and returns
Sivaprasad, S. and Muradoglu, Y.G. 2011. Capital structure and returns. in: Kent Baker, H. and Martin, G.S. (ed.) Capital structure & corporate financing decisions: theory, evidence, and practice Wiley. pp. 75-92

Permalink - https://westminsterresearch.westminster.ac.uk/item/8z186/the-effect-of-leverage-mimicking-portfolios-in-explaining-stock-returns-variations


Share this
Tweet
Email