Size and Liquidity Effects in Asia-Pacific Equity Markets

This study contrasts the effectiveness of the capital asset pricing model (CAPM) against more recent augmented variants including size and book-to-market factors (Fama and French, 1993) as well as both size and liquidity factors of Martinez et al (2005) in explaining average returns in industry portfolios across a comprehensive sample of Asia-Pacific equity markets. Size and especially liquidity effects were found to be pervasive across national industry portfolios which were further supported through the application of Kalman filter time varying techniques. The evidence suggests that there are distinct similarities between the determinants of returns in both Chinese exchanges, namely Shanghai and Shezen, the markets of Singapore and Malaysia also have common determinants in their returns. Estimates of cost of equity across industries reveals that Japan is lowest followed by Australia, New Zealand, Singapore, Malaysia, Hong Kong and South Korea. The emerging markets of Thailand, Indonesia and Philippines together with both Chinese exchanges have the highest values