Estimation of The Required Rate of Return Accordingto the CAPM & Fama & French 5F Models: A Comparative Study of A Sample of Companies Listed in the Iraqi Stock Exchange
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Abstract
The research aims to provide a comprehensive and clear picture of the theoretical and philosophical foundations of the capital asset pricing model (CAPM) and the Fama & French five-factor model. Through which the factors and variables that can exert an effective influence in estimating and analyzing the required rate of return and the mechanism of their interaction are diagnosed in a sample of companies. Listed in the Iraq Stock Exchange for the period (2005-2021) and according to the quarterly data (Panel Data), by adopting the Autoregressive Distributed Lag (ARDL) methodology, which explains the nature of the effect in the short term (error correction model).) and the long-term, in addition to the standard diagnostic tests it includes, such as the autocorrelation test for residuals, the test for instability of variance, as well as the test for model stability (structural stability of the estimated features) and the cumulative sum of the residuals test (CUSUM).
(7) sectors were selected out of (9) sectors listed in the Iraq Stock Exchange, which are the sectors (banks, insurance, investment, services, hotels and tourism, industry and agriculture), and the research sample included 14 companies out of 132 companies listed in the Iraq Stock Exchange. Finance, i.e. 10% of the research community.
The research found the weakness of the factors of the capital asset pricing model (CAPM) in analyzing and estimating the rate of return required to compensate the investor for the risk he bears. While the Fama & French five-factor model was able and by adding risk factors to the traditional model (CAPM) for the pricing of capital assets represented by: (Beta factor, volume factor, book value factor to market value, profitability factor and investment factor). From the interpretation of changes in the required rate of return, where the volume factor, the book value factor to market value, the profitability factor has a positive impact on the required rate of return in companies The research sample, while the investment factor exercised a negative influence on it.
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