Comparing Multi-Factor Asset Pricing Models to Explain the Variance in Common Stock Returns: An Analytical Study of the Iraq Stock Exchange

Abstract

This research aims to compare the multi-factor CAPM models by incorporating the momentum factor alongside the other five factors (β, book value-to-market value, size, profitability, and investment) to explain common stock returns. The research included a purposive sample of Iraqi companies operating in the market sector and listed on the Iraq Stock Exchange, for which the necessary financial data were available. The research aimed to address the research problem of evaluating the multi-factor CAPM models to determine which models are most capable of explaining the variance in common stock returns. A set of mathematical laws and relevant statistical methods were adopted to analyze the data of the companies included in the study. STATA v.13 was used as the primary tool for data analysis and time-series regression. The relationship between the CAPM's multifactor asset pricing model (CAPM) and common stock returns was also analyzed. The Gibbons-Ross-Shanken (GRS) statistic was also used to evaluate the validity of the CAPM's multifactor asset pricing model (CAPM) in explaining the changes in the stock returns of the sample companies. In this context, returns (above the risk-free interest rate) were used for 24 different investment portfolios over a period of 396 weeks, from October 2014 to May 2022. The study concluded with several conclusions, the most important of which is that the multifactor asset pricing model (FF6F) is the most effective model in explaining the stock returns of the researched companies. Momentum is the most important factor to consider to achieve higher returns, and the necessity of considering it before making investment decisions is one of the practical contributions of this study.