A CROSS-SECTIONAL ANALYSIS OF EXPECTED STOCK RETURNS : THE CASE OF SINGAPORE

Abstract

The market beta has all along been accepted in the Singapore stock market as an important factor in explaining average stock returns. However, recent evidence from the US showed that the market beta is unimportant and two other variables, namely, size and book-to-market equity suffice to describe average stock returns. In this academic exercise, various variables, in particular the market beta, are examined using local data. The other variables are size, book-to-market equity, leverage and earnings-price ratio. The methodology employed is the Fama-Macbeth month-by-month regressions as used in the study conducted in US. This allows a good comparison between the Singapore and US market. In our findings, the market beta is unimportant as in US. There seems to be an offsetting effect between the size and beta in average returns. Unlike the US result, the book leverage and the earnings-price ratio are needed to explain cross-sectional stock returns. The book-to-market equity and the market leverage have no explanatory power.