Empirical Asset Pricing – Saudi Stylized Facts and Evidence

Abstract

I estimate proxy specifications of (Fama and French, 2014) five-factor model to produce stylized facts of the Saudi capital market and test an APT model. The data set is the panel of 20 most actively traded firms, excluding firms with negative book value of equity. My contribution to the extant literature is three-fold: [1] organizing Saudi market data based on beta and firm-specific fundamentals, namely, growth, value, accounting earnings, and equity investments, [2] conducting a parsimony analysis within the theoretical framework of Merton’s (1973) APT, and [3] quantifying the information risk facing the marginal investor by decomposing earnings into cash flows and accruals and investigating respective loadings in an unrestricted version of the parsimonious specification. Proxy asset pricing specifications, though intuitively appealing, are scant due to lack of theoretical frameworks and misguided significance tests of factor loadings. Throughout, I address this issue and keep the empirical analysis under describing market facts and testing an APT model. The study concludes with a significant, empirical explanation that specifies average returns in terms of the covariance risk and accounting accruals.