Testing multi -factor asset pricing models in frontier markets: Vietnam stock market

Abstract

The Capital Asset Pricing Model (CAPM) as the benchmark asset pricing model generally performs poorly in both emerging markets and frontier markets. Various factor models have been proposed to overcome the shortcomings of the CAPM .Based on the characteristics of Vietnam as a standard frontier market, I apply the multi- factor asset pricing model with macroeconomic risk variables such as excess market returns, inflation, industrial production and term structures. This thesis examines both the CAPM and the multi-factor asset pricing models with macroeconomic risk variables to investigate their ability to explain the average stock returns using the data from Ho Chi Minh Stock Exchange (HoSE). The economic variables that are observed to perform relatively well in explaining variations in stock returns include inflation, excess market return, and term structure.