Behavioural Asset Pricing Determinants in a Factor and Style Investing Framework

Abstract

This paper offers an alternative perspective on determinants of equity risk using behavioural asset pricing ideology in a factor and style investing framework. First, a quasi-rational multifactor asset pricing determinants model with fundamental and behavioural risk factors is introduced. Then, the risk and return analysis is performed in a factors and style investing framework. The empirical tests are performed on a sample of 238 Malaysian firm stock returns and multifactor risk proxies with monthly frequency using the panel regression method. The baseline and robustness analyses provide evidence to support the dynamic of risk and returns relationships due to quasi-rational risk determinants and given different characteristics of sub-samples analysed. As a potential industry application, this research suggested the behavioural style quadrant as a diversification strategy. In specific, the risk and return analysis is organized in the multistyle sub-samples (i.e. firm, industry, and market states) to examine equity groups that are resilient on the influence of behavioural risks. Briefly, this paper offers valuable applications in investment practice on how to measure and manage behavioural risks.