Quality factors explaining returns on the FTSE/JSE All-Share
type: CreativeWork
description: The research done on style 'anomalies' such as the book-to-market and the size effect have found that these idiosyncratic factor s explain returns better than Beta. These findings have led has to an increased importance of idiosyncratic factors in explaining returns, which is contrary to the popular Capital Asset Pricing Model (CAPM). CAPM only considers Beta or systematic risk in explaining returns and disregards idiosyncratic risk. This paper has an even greater focus on idiosyncratic factors, by testing company specific factors with no reference to market valuation. These are defined as 'quality' factors for the purposes of this paper. The paper done by Asness, Frazzini, and Pedersen (2013), found that quality stock s earned excess returns in 23 of the 24 countries that they tested. This paper followed a similar approach with respect to the definition of quality and tested whether these 'quality' factors have explanatory power on the FTSE/JSE All-Share. The explanatory power of the 'quality' factors are then combined and compared with some of the style 'anomalies'. The results found that nine of the quality factors from the single regression analysis, over the entire period from the 1st of January 1994 until the 1st of November 2014 were significant at a 95% level of confidence. The following 'quality' factors were found significant and are ranked according to the absolute t-statistics:: Accruals ratio (ACCRUALS), cash flow return on equity (CFROE), 12-month growth in earnings per share (EPS12M), 12-month growth in cash flow return on equity (CFROE12M), 24-month growth in cash flow return on equity (CFROE24M), 12-month growth in EBITDA margin (EBITDAMARG12M), 36-month growth in cash flow return on equity (CFROE36M), interest coverage before tax (ICBT), return on total capital (ROC). In the single regression results the ACCRUALS ratio ranked higher than the book-value-to-market and the earnings yield. The CFROE also exhibited a higher level of significance than th…
abstract: The research done on style 'anomalies' such as the book-to-market and the size effect have found that these idiosyncratic factor s explain returns better than Beta. These findings have led has to an increased importance of idiosyncratic factors in explaining returns, which is contrary to the popular Capital Asset Pricing Model (CAPM). CAPM only considers Beta or systematic risk in explaining returns and disregards idiosyncratic risk. This paper has an even greater focus on idiosyncratic factors, by testing company specific factors with no reference to market valuation. These are defined as 'quality' factors for the purposes of this paper. The paper done by Asness, Frazzini, and Pedersen (2013), found that quality stock s earned excess returns in 23 of the 24 countries that they tested. This paper followed a similar approach with respect to the definition of quality and tested whether these 'quality' factors have explanatory power on the FTSE/JSE All-Share. The explanatory power of the 'quality' factors are then combined and compared with some of the style 'anomalies'. The results found that nine of the quality factors from the single regression analysis, over the entire period from the 1st of January 1994 until the 1st of November 2014 were significant at a 95% level of confidence. The following 'quality' factors were found significant and are ranked according to the absolute t-statistics:: Accruals ratio (ACCRUALS), cash flow return on equity (CFROE), 12-month growth in earnings per share (EPS12M), 12-month growth in cash flow return on equity (CFROE12M), 24-month growth in cash flow return on equity (CFROE24M), 12-month growth in EBITDA margin (EBITDAMARG12M), 36-month growth in cash flow return on equity (CFROE36M), interest coverage before tax (ICBT), return on total capital (ROC). In the single regression results the ACCRUALS ratio ranked higher than the book-value-to-market and the earnings yield. The CFROE also exhibited a higher level of significance than th…
author: Campbell, James
language: eng
date published: 2015
date modified: 2026-07-22T22:22:41Z
provider: University of Cape Town
publisher: Networked Digital Library of Theses and Dissertations
type: WebPage
source organization: Department of Finance and Tax

PropertyValue
property ID: Handle
value: http://hdl.handle.net/11427/15567