Australian Stock Indexes and the Four-Factor Model

  • Bruce A. Costa School of Business Administration, University of Montana
  • Keith Jakob School of Business Administration, University of Montana
  • Scott J. Niblock Southern Cross Business School, Southern Cross University, Australia
  • Elisabeth Sinnewe Southern Cross Business School, Southern Cross University, Australia
Keywords: Australia, Carhart, Equity, Funds, Stock Indexes, Performance

Abstract

Stock indexes are passive ‘value-weighted’ portfolios and should not have alphas which are significantly different from zero. If an index produces an insignificant alpha, then significant alphas for equity funds using this index can be attributed solely to manager performance. However, recent literature suggests that US stock indexes can demonstrate significant alphas, which ultimately raise questions regarding equity fund manager performance in both the US and abroad. In this paper, we employ the Carhart four-factor model and newly available Asian-Pacific risk factors to generate alphas and risk factor loadings for eight Australian stock indexes from January 2004 to December 2012. We find that the initial full sample period analysis does not provide indication of significant alphas in the indexes examined. However, by carrying out 36-month rolling regressions, we discover at least four significant alphas in seven of the eight indexes and factor loading variability. As previously reported in the US, this paper confirms similar issues with the four-factor model using Australian stock indexes and performance benchmarking. In effectively measuring Australian equity fund manager performance, it is therefore essential to evaluate a fund’s alpha and risk factors relative to the alpha and risk factors of the appropriate benchmark index.

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Author Biographies

Bruce A. Costa, School of Business Administration, University of Montana

Bruce A. Costa is Professor of Finance, School of Business Administration, University of Montana, United States

Keith Jakob, School of Business Administration, University of Montana

Keith Jakob is Donald and Carol Jean Byrnes Professor of Finance, School of Business Administration, University of Montana, United States

Scott J. Niblock, Southern Cross Business School, Southern Cross University, Australia

Scott J. Niblock is Lecturer of Finance, Southern Cross Business School, Southern Cross University, Australia

Elisabeth Sinnewe, Southern Cross Business School, Southern Cross University, Australia

Elisabeth Sinnewe is Associate Lecturer of Finance, Southern Cross Business School, Southern Cross University, Australia

Published
2014-06-30
How to Cite
Costa, B. A., Jakob, K., Niblock, S. J., & Sinnewe, E. (2014). Australian Stock Indexes and the Four-Factor Model. Applied Finance Letters, 3(1), 10-21. https://doi.org/10.24135/afl.v3i1.17