Beta, size, book-to-market, and the cross-section of stock returns in Taiwan: Measurement errors and seasonalities*

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I-Hsiang Huang

**

Department of Finance, National University of Kaoshiung

Comments are welcome

First draft: February 3, 2004 Second draft: April 7, 2004 This draft: November 10, 2004

The authors gratefully acknowledge constructive and helpful comments from Roger Chen, Yung-Jang Wang, and Gili Yen. The paper has also benefited from workshop at the National Chi Nan University, National Chung Hsing University, and National Kaohsiung First University of Science and Technology. All remaining errors are our own. ** Address correspondence to I-Hsiang Huang, Department of Finance, National University of Kaoshiung, Kaohsiung, Taiwan. Tel: 886-7-5919499, Fax: 886-7-5919329, E-mail: ihhuang@nuk.edu.tw.

Beta, size, book-to-market, and the cross-section of stock returns in Taiwan: Measurement errors and seasonalities

Abstract This paper investigates the explanatory power of market beta, firm size, and book-to-market ratio, regarding the cross-sectional expected stock returns in Taiwan. In particular, the paper proposes a simple method to correct the errors-in-variables problem in estimating market beta in the two-pass tests of asset pricing models. The results indicate that the explanatory power of market beta is significantly improved and successfully captures the cross-sectional variation in expected stock returns for the full sample period after taking the correction into account. In addition, mean stock returns appear not only a January seasonal but also a Chinese New Year seasonal. Most interestingly, the evidences also exhibit a January seasonal both in the beta risk premiums and in the regression coefficient of firm size, as well as a Chinese New Year seasonal in the regression coefficient of book-to-market ratio that is untested before.

JEL classification: G12; G14 Keywords: CAPM; Market beta; Market seasonalities; Anomalies; Taiwan Stock Market

1. Introduction

One of the most important issues in finance is what factors determine expected returns on stocks. The capital asset pricing model (CAPM) developed by Sharpe (1964), Linter (1965), and Black (1972) is undoubtedly the most important advance in asset pricing. It suggests a positive linear relation between market beta and expected stock returns. The CAPM was seriously called into question by now since the publication of Fama and French (1992), their empirical findings based on U.S. market suggest that market beta is unable to explain the cross-section of expected stock returns.1 To date, the central debate regarding empirical asset pricing is whether the market beta is alive or not. The second one is whether there are other factors on top of market beta affect stock returns. In the meantime, Black (1993), one of the most aggressive advocators of market beta, pointed out that the test of Fama and French (1992) leaves some important issues unsolved and strongly argues for more empirical evidences outside the U.S. market to justify whether the market beta is still alive or not. In response to Black (1993), the main purpose of this paper is to investigate the explanatory power of market beta, firm size, and book-to-market ratio, on the cross-section of expected stock returns by using a sample of firms listed on Taiwan Stock Exchange (TSE) and Taiwanese Over-the-counter Securities Exchange (TOTC). In recent years, Taiwanese economy has played an important role in both Asian and world economy. Many libertarian

There are some studies may contradict the CAPM prior to Fama and French (1992), such as Banz (1981), Reinganum (1981), Basu (1983), Hawawini et al. (1983), Rosenberg et al. (1985) and others. However, the market beta is alive is popularly supportive by most part of literatures, such as Black et al. (1972), Fama and MacBath (1973), Hawawini and Michel (1982), Chan and Chen (1988), Handa et al. (1989) and others. Since Fama and French (1992), the empirical evidences around the world in support of or against the market beta are coexisted. The advocators of beta alive such as Chou and Liu (2000), Clare et al. (1998), Downs and Ingram (2000), Handa et al. (1993), Heston et al. (1999), Huang et al. (2003), Jagannathan and Wang (1996), Kim (1995), Kothari et al. (1995). Evidences against the beta alive like Asgharian and Hansson (2000), Chui and Wei (1998), Daniel et al. (2001), Hu (1998), Liu et al. (1996), Sheu et al. (1998) and others. When CAPM under such strenuous attack, there are some appealing and competitive models, including the intertemporal CAPM of Merton (1973) and Breeden (1979) and APT of Ross (1976), which are likely to replace it. 2

policies and deregulations have been developed and implemented. In addition, the trading activity of TSE is one of the largest security markets among Asian stock market. Foreign institutional investors have been attracted to TSE market because of its growth potential. Empirical evidences from Taiwanese firms may allow us to ascertain furthermore what factors are most important in determining stock returns and may help us to understand the seasonal behavior of risk premium from the perspective of an emerging market. According to Bekaert and Harvey (1993), standard models are often ill suited to deal with the specific circumstances arising in the emerging markets and the study of the emerging market has provided impetus for both the adaptation of current models to new circumstances in these markets and the development of new models. Therefore, this study may offer additional insights into controversies surrounding U.S. market and others. In generic terms, the methodology adopted in this paper is the standard two-pass test of asset pricing model that is developed originally by Fama and MacBeth (1973). The procedures of two-pass tests are performed as follows. Market beta of each asset with respect to market portfolio is estimated from a first-pass separate time series regressions. In the second-pass, the estimated betas are used in cross-sectional regressions (CSR) to estimate the risk premium of market beta month-by-month and then through statistical tests to examine whether estimated regression coefficients are significantly deviated from zero. However, the errors-in-variables problem is inevitable to arises because of the true market beta of each asset is unobservable and is estimated with errors. Previous studies have been devoted to solving the errors-in-variables problems and presented some support for the use of the modified estimation method as an alternative to the traditional estimation. For example, Litzenberger and Ramaswamy (1979) proposed a weighted least squares version of the risk premium estimator. Shanken (1992) derives an asymptotic distribution of the CSR estimator within a multifactor framework and under the assumption that asset returns are conditionally homoskedastic. Recently, Kim (1995)
3

derives a modified method that is performed through a maximum-likelihood estimation under either homoskedastic or heteroscedastic disturbance terms of the market model by utilizing the extracted information of measurement error and idiosyncratic error. This paper proposes a simple method that can be easily performed to correct the beta measurement errors. In fact, the measurement error of market beta that conditional on the market return is a function of the idiosyncratic error terms prior to each CSR. We conduct a two-step method to correct the beta measurement errors of each asset. In the first step, the idiosyncratic error terms for each firm during the full sample period are estimated by using the market model adjusted nonsynchronous trading (Dimson, 1979). In the second step, market beta for each asset at specific time is estimated and then adjusted the measure error estimated from prior step that is a function of idiosyncratic error terms prior to each CSR. What is the exact functional form of measurement error of market beta and how to estimate it will be described in more detail in the next section. Based on the findings of Fama and French (1992), the firm size effect of Banz (1981) and book-to-market effect of Rosenberg et al. (1985) are two prominent challenges in the contemporary asset pricing literature.2 Given the empirical evidences in other countries around the world, we have little knowledge about the role of market beta, firm size and book-to-market ratio on the cross-section stock returns in Taiwan. Previous studies presented diverse empirical results. Chui and Wei (1998) find little relationships between expected stock returns and conditional beta, firm size, and book-to-market ratio for Taiwanese industrial firms. Sheu et al. (1998) also present empirical evidence that

See Hawawini and Keim (1995) for an excellent review of this issue. There is controversy over why the firm-specific attributes can explain the cross-section of expected stock returns. There are at least three explanations have been offered for the empirical findings. The first view argues that such firm-specific variables are used to find those stocks systematically mispriced by the market (Lakonishok et al., 1994; Daniel and Titman, 1997). Alternatively, according to asset pricing theory of Merton (1973), these firm-specific variables may proxy for a risk factor in stock returns (Chan and Chen, 1991; Fama and French, 1993, 1996). The third view is that the observed empirical findings are largely the result of data snooping and various biases in the data (Black, 1993; MacKinlay, 1995; Kothari et al., 1995). There is no attempt to study why the firm-specific attributes can explain the cross-section of expected stock returns in this analysis. 4

unconditional beta fail to capture the cross-sectional variation in stock returns. Surprisingly, Huang (1997) finds an inverse relationship between returns and market beta. In contrast, Chou and Liu (2000) show that the unconditional betas of Taiwanese industrial firms significantly explain the cross-sectional variation in stock returns while the loadings of a portfolio long in high book-to-market stocks and short in low book-to-market stocks and a portfolio long in small stocks and short in big stocks, similar to Fama and French (1993), are without explanatory capability. In addition, Ma and Shaw (1990) show that stock returns are higher for small firms than large firms and the return difference between small firms and large firms is higher and significantly differs from zero in January. Yet, for the same variable, Chou and Johnson (1990) present inconsistent evidence. Three notable differences among these studies are the method of estimating market beta, sample selection, and the timing of firm size used. To avoid the possibility of potential data survivorship bias, the sample of this study has included financial firms and firms listed on Taiwanese TOTC market that are often ignored in previous studies.3 Moreover, Fama and French (1992) used the firm value in June of year t to explain the monthly returns from July of year t to June of year t+1. Rather, the firm size used in this study is the market value of equity of the firm as of the end of the second to last month. This measure has two merits. The first is to enhance the degree of relevance of explanatory variables. Second, the firm size variable is lagged one additional month in order to preclude the possibility that a linear combination of stock returns, book-to-market ratio, and the product of price multiple shares may lead to bias estimate because of bid-ask effects and thin trading.4 The second goal of this paper is devoted to the analysis of seasonal behavior in stock returns and in the beta risk premium. Initially, the stock return of U.S. market is on average
3

Because Fama and French (1992) were initially interested in analyzing the impact of firm leverage on stock returns, they excluded from their study all financial firms. Naturally, this treatment may subject to data selection bias and data-snooping bias (Black, 1993). 4 See Jegadeesh (1990). It is easy to show that thin trading will cause risk-adjusted returns to exhibit first-order negative serial correlation. 5

higher in January than during the rest of the year is addressed by Rozeff and Kinney (1976). Subsequently, Keim (1983) shows that most of the excess returns for small firms are concentrated in January.5 Furthermore, Tinic and West (1984) document that the positive relation between beta and stock returns in U.S. market is restricted to January and the beta risk premiums during the rest of the year are insignificantly different from zero. Corhay et al. (1987) also find that the beta risk premium in Belgium market is significantly positive in January. Rather, they observe a positive January beta risk premium in U.K. and France but are not significantly different from zero. Moreover, Chui and Wei (1998) fail to find that beta risk premiums in January are significantly different from zero for five Pacific-Basin emerging markets. The above evidences seem to suggest that the seasonal behavior in beta risk premium is related to the seasonal behavior in stock returns. What this paper differs from previous studies are the data we used is firm level instead of portfolio and is more complete than previous studies for Taiwanese firms. Moreover, there is no tax on capital gains for individual investors in Taiwan nor is there any tax benefit for capital loss. In addition to January seasonal in stock returns, Lee et al. (1992) find a Chinese New Year (CNY) effect that is unique to Asian stock markets.6 Their findings show that average stock return of Asian markets is on average higher in the months of CNY than the rest of the year. In light of previous evidences and arguments, if average returns can be higher in January and in the CNY months, why isnt it possible for beta, firm size, book-to-market

Keim (1983) offers two possible explanations for this finding: the tax-loss-selling hypothesis and the information hypothesis. According to the tax-loss-selling hypothesis, toward the tax year end of December 31 stockholders sell stocks that have declined in price during the year and utilize the tax benefits for capital loss. As soon as the tax year ends, the selling pressure is relieved and stocks quickly rebound to their equilibrium levels. The above hypothesis has been tested using the stock markets outside the U.S. that without capital gains tax. The empirical evidences are controversies. See Agrawal and Tandon (1994), Berges et al., (1984), Brown et al., (1983), Corhay et al. (1987), Gultekin and Gultekin (1983), Kato and Schallheim (1985), Lee (1992), Reinganum and Shapiro (1987), Tinic et al., (1987), and so on. The empirical experiences of U.S. market see Keim (1983), Jones et al., (1991), Roll (1983), Schultz (1985), Van de Bergh and Wessels (1985), Watchtel (1942), and so on. In addition, the information hypothesis refers to the supposition that smaller firms have less publicly available information than do large firms. This lack of information leads to greater risk and resulting in higher returns for small firms. This hypothesis is supported such as Berry and Brown (1984). 6 See also Yen et al., (2001), and Yen and Shyy (1993). 6

ratio and stock returns to have a systematic relationship with excess returns in January and the CNY monthsH Until now, we have no idea about what is the effect of the CNY seasonal in stock returns in the testing of the asset pricing. The empirical evidence of the present study clearly shows that there exist both January seasonal and CNY seasonal in average stock returns in Taiwan. Remarkably, the regression coefficient for beta, firm size, and book-to-market ratio also display eminent seasonal behavior. The results show that there is a January seasonal in beta risk premium and in the regression coefficient of firm size, as well as a CNY seasonal in the regression coefficient of book-to-market ratio that is untested before. Unlike the finding of Loughran (1997), we dont find a January seasonal in book-to-market effect. The above evidences from an emerging market may have important implications both in asset pricing test and in market efficient hypothesis. The remainder of this paper is organized as follows. Section 2 first details the effect of error-in-variables problem on the estimated beta risk premium and then proposes a simple method to correct this bias. Section 3 describes the data. The empirical results are presented and discussed in section 4. Section 5 presents conclusions.

2. Two-pass tests of asset pricing models

2.1. Effect of measurement error on estimated market risk premiums In this section, we start with the two-pass tests originally developed by Fama and MacBath (1973) and then examine the effect of measurement error on estimated risk premiums of market beta in the regression analysis. Finally, a simple method of correcting the measurement error of market beta is proposed. The relationship between expected stock returns and market beta in the second-pass CSR for estimating the market risk premiums at a specific time t is
R t = 0 t + 1t t + t ,

t=1,,T,

(1)

where

Rt

and

are N-vector of excess returns over risk-free rates and the market betas
7

for N stocks,

is a N-vector of the idiosyncratic error with mean zero and variance

1t t

2 .

The main interest is focused on whether the regression coefficient, zero or not. Hence, the ordinary least squares (OLS) CSR of month. By letting
X = [1N , ] Rt

, is indifferent from can be run for each

on

and

= [ 0 , 1 ]' ,

the OLS estimate of

at time t is (2)

OLS 1 OLS OLS 1 = [ t 0t , t ]' = ( X t ' X t ) ( X t ' R t ) .

where

1N

denote the N-vector of ones. The test statistic of testing whether the market beta

risk premium is indifferent from zero or not is

t OLS =
OLS 1 OLS 1 t .

OLS 1 OLS 1 s( t )/ T

(3)

is the time series mean of

Because the variance of individual stock return may

be different, then the generalized least squares (GLS) estimate of

will be more efficient

than OLS estimate. The month-by-month CSR coefficient estimated from GLS at time t is
GLS 1 1 1 GLS GLS 1 = [ t 0t , t ]' = ( X t ' t X t ) ( X t ' t R t ) ,

(4)

where

is the N N variance matrix of all firms at time t. We assume that the error terms

are serially independent and uncorrelated across stocks. Similarly, the test statistic of testing whether the market beta risk premium is indifferent from zero or not is t GLS =
GLS 1 GLS 1 t .

GLS 1 GLS 1 s( t )/ T

.
, t 1

(5)

is the time series mean of

t

In general, the estimated beta,

is used as a proxy

for

since

is unobservable. Therefore, the explanatory variable is measured with

error
t 1 = t + t 1 ,

(6)

where

t 1

is a N-vector of the market beta estimated from the first-pass time series
t 1

regression by using the market model for K time series data available up to t-1, and a N-vector of the measurement error with mean zero and variance
2

is

Consider, then, the second-pass CSR for estimating the market risk premiums at a
8

specific time t. By substituting equation (6) into equation (1), we obtain,

R t = 0 t + 1t t 1 + ( t 1t t 1 ) = 0 + 1 t 1 + t ,

(7)

Apparently, the explanatory variable in relation (7) is correlated with error term. It hence violates one of the crucial assumptions of classical regression model. For the sake of simplicity, the constant term is ignored and then the OLS estimator of market risk premium is,
OLS 1 ' 1 = ( t t 1 t 1 ) ( t 1 ' R t ) .

(8)

We insert relations (1) and (6) into relation (8) and use the Slutsky theorem to examine whether the estimated market risk premium is consistent or not. The probability limit of the estimated market risk premium is,7
OLS 1 p lim = t

1t
2 1 + /Q

,
2

(9) , is

where Q= p lim(1 / N )( t ' t ) . As long as the variance of measurement error of beta, positive, the estimated market beta risk premium,
1t

, is inconsistent, with a persistent bias

toward zero. Obviously, the greater the variability in the measurement error of beta, the higher the bias in the estimated market beta risk premium. This is the very reason why so many efforts have devoted to eliminating or mitigating the error-in-variable problem in estimating market beta.

2.2. A simple method of correcting measurement error of beta In what follows, we propose a simple method to correct the measurement error of market beta. Assuming that the return-generating process at specific time t is,
R t = t + t R mt + t ,

(10)

where

R mt

is a N-vector of market return,

2 .

is a N-vector of the idiosyncratic error with

mean zero and variance

The estimated market beta for the period of s, time t-k to time

See Greene (1993) for a detail of demonstrating this result. 9

t-1, is,
t 1

t 1 =

s= t k t 1

( R ms R ms ) R s

, s [t-k, t-1],

(11)

s= t k

2 ( R ms R ms )

After substituting the relation (10) into relation (11), the estimated market beta for the period of s, time t-k-2 to time t-1, is become,
( R ms R ms )s s= t k = + t 1 t t 1 2 ( R ms R ms )
s= t k t 1

, s [t-k, t-1],

(12)

The second term of the right side of relation (12) is the measurement error mentioned above,
t 1 .

This measurement error at specific time is just a function of the idiosyncratic

error during the period of estimating beta. Naturally, the true market beta can be found only if the overall data of asset return is collected. That is to say that the populations of all asset returns are available. However, the stock markets continuously process through time. Therefore, we begin by assuming that there is a common terminal data for all asset returns. The rationale of this assumption follows the studies of Chan and Chen (1988) and Fama and French (1992). Hence, the common terminal date for all firms is June 2002 in this paper. A simple method of estimating the measurement error of beta is then proposed by a two-step estimation procedure. In the first step, the idiosyncratic error for each asset during the overall period is estimated by running regression (10). In the second step, this estimated measurement error of market beta for each asset at specific period is computed as the second term of the right side of relation (12) and then use it to correct the estimated beta at that time interval.

3. Data

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This paper uses monthly data of all firms, including financial and nonfinancial firms, listed on Taiwan Stock Exchange (TSE) and Taiwanese Over-the-counter Securities Exchange (TOTC) for the period from July 1982 to June 2002. As suggested by Fama and French (1992), the following data selection criteria are applied. First, all firms must have monthly stock returns for at least 24 months before entering the sample. Second, firms must have a non-negative book value at the end of December each year to compute their book-to-market ratio. Book value of equity is defined as total shareholders equity minus book value of preferred stock. Book-to-market ratio (B/M) is equal to book value of equity divided by the market value of equity as of the end of December of year t-1. Fama and French (1992) use the market value of equity of the firm in June of year t to explain the monthly returns from July of year t to June of year t+1. Rather, the firm size used in this study is the market value of equity of the firm as of the end of the second to last month to explain the next two monthly returns month-by-month. Firm size variable was lagged by one additional month in order to preclude the possibility of bias estimation because of bid-ask effects and thin trading. Conditional market betas for all firms are estimated on 24 to 60 months as available in the five years prior to each monthly excess returns and are the sum of the coefficients from a regression of monthly returns on the current and prior months returns on the value-weighted portfolio of TSE and TOTC stocks. In addition, we calculate the measurement error of estimate market beta month-by-month discussed earlier to correct estimated market beta to derive the adjusted market beta. Both market betas, unadjusted and adjusted beta, are estimated monthly and are used to explain the stock returns in the next two months. The sample consists of 63 firms in the first month and 584 firms in the final month. There are totally 4,307 firm-years and 51,684 monthly returns observations in this analysis. The TOTC market is called into existence in July 1994. At the inception only 3 firms are considered; however, in the final month, there are 115 firms. Prior to the establishment of
11

TOTC market, the mimic market portfolio is just the value-weighted index return of TSE. We reconstruct a value-weighted stock portfolio of incorporating TSE and TOTC after July 1992. The sample this study used is more complete than previous studies for Taiwanese firms. In addition, since there is no Taiwanese equivalent to U.S. Treasury bills, we us a combined series of rediscount rates (before October 1984 and after July 1999) and the 91-day T-bills rate (October 1984-July 1999) as a proxy for the risk-free rate. Excess stock returns are stock raw returns in excess of this risk-free rate.

[Insert Table 1 here]

Table 1 reports summary statistics for the explanatory variables, unadjusted and adjusted market beta, firm size (in NTC 10 million), and book-to-market ratio during the entire period. In order to delineate the preliminary relationship among these variable, five portfolios are formed monthly. The results of the full sample are reported in panel A, table 1. Mean adjusted beta is 0.85 and is slightly higher than the unadjusted beta of 0.798. The standard deviation of adjusted beta is slightly smaller than unadjusted beta. Moreover, mean market value of equity for the full sample is NT C 18950 millions. Panel B of Table 1 reports that the mean of the unadjusted betas range from 0.214 for lowest beta portfolio to 1.454 for highest beta portfolio, while the mean of the adjusted betas range from 0.358 for lowest beta portfolio to 1.384 for highest beta portfolio. Beta spreads between highest beta portfolio and lowest beta portfolio for the adjusted beta is 1.026 and is smaller than its counterpart 1.24 of the unadjusted beta. The maximum standard deviations for both adjusted and unadjusted betas occur at low beta portfolio simultaneously. Besides, there is no systematical relationship between market beta and book-to-market ratio. We find that the highest beta portfolio is associated with the largest firm while the lowest beta portfolio is associated with the smallest firm. It exhibits weakly negative relationship between market
12

beta and firm size. Panel C of Table 1 presents the results that within a firm size, the market value of equity ranges from NT C 1890 millions for the smallest firms to NT C 69960 millions for the largest firms. There is a significantly negative relationship between firm size and book-to-market ratio in which portfolios are formed on firm size and relationship of this kind is also found in Panel D of Table 1 in which portfolios are formed on book-to-market ratio. The book-to-market ratio ranges from 0.299 for the lowest group to 1.421 for the highest group.

4. Empirical Results 4.1. Portfolio returns and seasonality In this section, we first study whether there is seasonal behavior in Taiwan stock market. We next turn to investigate how market beta and two important firm attributes, firm size and book-to-market are related in pricing the underlying asset. Finally, we examine whether there are any systematical relationships between market price and seasonal behavior in stock returns. Seasonalities under considerations are the January effect and the CNY effect that unique to Asian stock market. Table 2 shows that portfolios are formed on unadjusted market beta, adjusted market beta, firm size, and book-to-market ratio. All firms are sorted by calendar events, January and CNY, to examine the seasonal behavior in stock returns and in return spreads.8 To the extent that beta or firm attributes are taken into account in

Portfolio formation approach may either mitigate problems caused by using estimated variables as independent variables in a two-pass methodology or, when a one-step methodology is used, allow us to estimate the covariance matrix of residual returns. However, three types of problem may occur. First, the portfolio grouping procedure ignores the dynamic period-by-period relation between stock returns and explanatory variables. Second, as Roll (1977) has pointed out, the portfolio formation process, by concealing possibility return relevant security characteristics within portfolio averages, may make it difficult to reject the null hypothesis of no effect on security returns. Third, Lo and MacKinlay (1990b) make an almost opposite point, that if the portfolios are formed on the basis of characteristics that previous studies have found to be related to stock return, it will be inclined to reject the null hypothesis too often due to a data-snooping bias. The third problem may be less serious than it first might appear because the number of studies of Taiwanese stock market is so smaller than U.S. market. 13

pricing, the mean excess return spreads should be systematically positive and significantly indifferent from zero. From Panel A of Table 2, mean excess returns for all months is 1.083 and, indeed, display pronounced seasonality. Mean excess returns are relatively higher for the January and CNY months (9.648M and 5.662M , respectively), relatively lower, but positive for non-January and non-CNY months (0.305M and 0.667M , respectively).

[Insert Table 2 here]

The individual firms are further partitioned into five portfolios based on their unadjusted beta, adjusted beta, firm size, and book-to-market ratio, to examine preliminarily whether the market beta and firm attributes are priced and their risk premiums are related to market seasonality or not. The results show that the adjusted market beta is priced and excess return spreads are also related to calendar seasonal. In Panel A of Table 2, mean excess return for all firms, when portfolios formed on unadjusted beta, ranges from 1.012 for the lowest beta portfolio to 1.201 for the highest beta portfolio while mean excess return spreads between the highest and lowest portfolio is 0.189 with a t-statistic of 0.72. When portfolios are formed on adjusted beta, Panel B of Table 2 present that mean excess return for all firms ranges from 1.037 for the lowest beta portfolio to 1.611 for the highest beta portfolio. Its mean excess return spreads between the highest and lowest portfolio is 0.574 with a t-statistic of 2.19. The above result supports our prediction. In addition to the results of all firms, mean excess return spreads for January and CNY months are 6.217 with a t-statistic of 5.16 and 4.967 with a t-statistic of 5.68 (9.495 with a t-statistic of 8.19 and 5.943 with a t-statistic of 6.72) when portfolios formed on unadjusted (adjusted) beta. In contrast, mean excess return spreads for non-January and non-CNY months are very small and are insignificant no matter how portfolios are formed on unadjusted beta or adjusted beta. This finding indicates that there is seasonal behavior in
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both beta risk and returns. What this paper differs from Tinic and West (1984) is that unadjusted beta is not priced for Taiwanese firms but adjusted beta is priced. In addition, this paper finds a January seasonal while Chui and Wei (1998) dont find it. We further examine whether firm size and book-to-market ratio are priced and are related to seasonal behavior in stock returns. Panel C and Panel D of Table 2 provide preliminary tests. The results indicate that firm size and book-to-market ratio may not be priced in all firms because mean spreads of each quintile are not only highly volatile but also negative some time. Instead, firm size is priced in January and book-to-market ratio is priced in CNY months for mean return spreads of each quintile are systematically positive. In Panel C of Table 2, mean excess return spreads for January is 7.672 with a t-statistic of 6.45 and the mean spread range from 2.92 for lowest quintile to 1.62 for the highest quintile. Panel D of Table 2 presents the results when portfolios are formed on book-to-market ratio. For the months of CNY excludes January, mean excess return spreads for lowest quintile is 2.586 with a t-statistic of 2.98 and the mean spreads of each quintile are also systematical positive.

4.2. Cross-sectional regression results In Table 3 of Fama and French (1992), they used cross-sectional regressions of expected stock returns on market beta, firm size, and book-to-market ratio for full samples to attack the CAPM. In this section, we use a similar approach with revisions in estimating market beta and the timing of firm size to examine whether market beta, firm size, and book-to-market ratio have the capability of explaining expected stock returns. In addition to examining the samples of overall period like Fama and French (1992), this paper further explores whether there are seasonalities in the regression coefficients of market beta, firm size, and book-to-market ratio. The empirical evidences do show that the explanatory power of market beta after correcting measurement error is improved and has significant
15

capability of explaining expected returns. Besides, the results also reveal there are distinctive seasonalities in the regression coefficients of market beta, firm size, and book-to-market ratio.

[Insert Table 3 here]

Table 3 reports the results for the sample of the overall period. The mean OLS (GLS) regression coefficient for the unadjusted beta is 0.202 (0197) with a t-statistics of 0.47 (0.46). When the adjusted beta is used as explanatory variable, mean OLS (GLS) regression coefficient increases to 0.734 (0.772) and the t-statistics sharply jumps to 1.67 (1.75). Moreover, 113 (109) of the 240 OLS (GLS) estimates of the unadjusted beta risk premiums are positive. The positive number of coefficient is also lower than the OLS (GLS) estimates of adjusted beta risk premiums. The above results are not altered when firm size and book-to-market ratio are introduced. Statistically, the mean regression coefficient of firm size and book-to-market ratio are indifferent from zero.

[Insert Table 4 here]

Table 4 presents the results for January and non-January months. In Panel A of Table 4, the t-statistics for the regression coefficient of market beta, including unadjusted and adjusted beta, and firm size are all significantly different from zero in January. The t-statistics for the regression coefficient of book-to-market ratio remains insignificantly in January. For example, the OLS regression coefficient of the unadjusted (adjusted) beta is 4.113 (5.341) with a t-statistics of 2.09 (2.65) in January. The OLS (GLS) regression coefficient of firm size is 1.443 (-1.396) with a t-statistics of 2.15 (-2.04) in January. The results still hold even market beta, firm size, and book-to-market ratio are considered
16

simultaneously. In contrast, the Panel B of Table 4 indicates that market beta, firm size, and book-to-market ratio are unable to explain stock returns in non-January months. The above findings are consistent with previous studies such as Tinic and West (1984), but unlike the findings of Chui and Wei (1998).

[Insert Table 5 here]

The results for the CNY effect on risk premium are presented in Table 5. Like the results for non-January months, the Panel B of Table 5 indicates that market beta, firm size, and book-to-market ratio are unable to explain stock returns in the non-CNY months. Rather, the t-statistics for the regression coefficient of market beta, including unadjusted and adjusted beta, and book-to-market ratio are all significantly different from zero in the CNY months. For example, the OLS regression coefficient of the unadjusted (adjusted) beta is 3.555 (3.503) with a t-statistics of 1.84 (1.76) in the CNY months. The OLS (GLS) regression coefficient of book-to-market ratio is 1.649 (1.679) with a t-statistics of 1.67 (1.71) in the CNY months.

[Insert Table 6 here]

Because of there are 6 of 20 January months in which are also CNY months. In Table 6 we have reproduced the two-pass tests of Fama and MacBath (1973) for pure January months and pure CNY months. The pure January (CNY) month is the January month that is not CNY (January) month. It shows that prior findings for January months are not changed but the results for CNY month are slightly altered. From Panel A of Table 5, beta and firm size still have the significant capability of explaining expected returns. Rather, the market beta has lost its significant explanatory power on excess returns in Panel B of Table 6. The
17

t-statistics of regression coefficient for firm size become significant.

5. Conclusions

This paper proposes a simple method of correcting measurement error in beta estimation by utilizing the idiosyncratic error of overall period tested in the two-pass tests of asset pricing model. The empirical evidence from Taiwan stock market really show that the explanatory power of estimated market beta after this correction is improved significantly and successfully captures the cross-sectional variation in stock returns for the samples of overall period even if firm size and book-to-market ratio are introduced. Unlike the finding of Fama and French (1992), we show that firm size and book-to-market ratio have no role in explaining the cross-section of stock returns for the samples of overall period in Taiwan. Our findings cannot reject the hypothesis that the pricing of stock returns on the Taiwan stock market conforms to the CAPM. Furthermore, in reflecting on whether the risk-return relation driven by calendar seasonal, as reported in Tinic and West (1984) and others, we think it important to recall that the CNY effect unique to Asian stock market. Indeed, we do find that there exist both a January seasonal and a CNY seasonal in average stock returns in Taiwan. The evidence of an emerging market that without capital gains tax may cast doubt on the tax-loss-selling hypothesis as an explanation of the January effect. The emergent issues are why seasonal variations of stock returns are so popular across the national stock markets that with different financial systems and most of what today constitutes the received concept of modern finance are brought into question. Remarkably, the regression coefficient for beta, firm size, and book-to-market ratio also display distinctive seasonal behavior. The t-statistics for the regression coefficients of market beta, including unadjusted and adjusted beta, and firm size are significantly
18

different from zero but is insignificant for book-to-market ratio in January. Rather, the book-to-market ratio is significantly positive related to stock returns in the months of CNY. At the same time, our empirical findings show that beta, firm size, and book-to-market ratio are not able to explain stock returns outside the January and the CNY months. According to Fama and MacBeth (1973), the market efficient hypothesis and model specification are considered simultaneously in the testing of asset pricing model. Thus, we address a puzzle like Tinic and West (1984) that why the risk-ruturn trade-off shows up only in certain months, such as the months of January and CNY, and why these certain months are just the months with higher stock returns than the rest of the year. In addition, the explanation of a proxy for risk factor and of market mispricing hypothesis for the size effect and book-to-market effect are seemingly unable to tell us the whole story of why the regression coefficient of firm size and book-to-market ratio are also significantly different from zero in these certain months and are insignificantly different from zero during the rest of the year. It seems relevant to investigate whether the intertemporal CAPM of Merton (1973) and Breeden (1979) and APT of Ross (1976) are also subjected to certain calendar seasonal in stock returns. However, we conjecture that some unsolved issues related to asset pricing test should obtain valuable insights from these investigations.

19

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22

Table 1 Summary statistics for adjusted market beta, unadjusted market beta, market value of equity, and book-to-market ratio in Taiwan: July 1982 to June 2002
The sample contains all firms, including financial and nonfinancial firms, listed on Taiwan Stock Exchange (TSE) and Taiwanese Over-the-counter Securities Exchange (TOTC) for the period from July 1982 to June 2002. It consists of 63 firms in the first month and 584 firms in the final month. There are totally 4,307 firm-years and 51,684 return observations. Portfolios are formed monthly. The TOTC market is introduced in July 1994. All firms are allocated to five portfolios based on their market beta, firm size (ME), and book-to-market (B/M) ratio. and k denote unadjusted and adjusted market beta, respectively. The firm size used to form portfolios is the market value of equity as of the end of the second to last month. The market beta used to sort portfolios is the estimated conditional beta as of the two months previous to stock returns. In addition, the book-to-market ratio is equal to book value of equity divided by the market value of equity as of the end of December of year t-1. Panel A, B, C, and D show the results for full samples, portfolios formed on unadjusted market beta, on firm size, and on book-to-market ratio, respectively.
k

ME Means

BE/ME

ME

B/M

Standard deviations Panel A: Full sample

0.754 0.534 0.524 5579 0.791

All Low-
-2 -3 -4

0.798

0.850

1895

Panel B: Portfolios formed on

0.214 0.549 0.767 1.004 1.454 0.358 0.639 0.836 1.032 1.384 1306 1524 1337 1856 3449 0.740 0.743 0.750 0.794 0.744 0.439 0.332 0.261 0.222 0.360 0.530 0.379 0.299 0.293 0.413 2128 3456 2601 6023 9633 0.740 0.686 0.555 0.808 1.072

High- Small-ME ME-2 ME-3 ME-4 Big-ME Small-B/M B/M-2 B/M-3 B/M-4 Big-B/M

Panel C: Portfolios formed on firm size(NTC 10million)

0.756 0.776 0.804 0.794 0.859 0.822 0.852 0.850 0.833 0.893 189 389 664 1229 6996 0.967 0.856 0.768 0.682 0.499 0.528 0.497 0.516 0.541 0.581 0.509 0.483 0.504 0.534 0.583 149 249 390 651 11032 1.155 0.844 0.708 0.585 0.342

Panel D: Portfolios formed on B/M

0.904 0.794 0.756 0.736 0.800 0.963 0.836 0.791 0.784 0.876 4519 1759 1258 1057 888 0.299 0.499 0.669 0.882 1.421 0.589 0.544 0.523 0.491 0.503 0.585 0.550 0.509 0.466 0.483 10902 3448 2456 2524 1912 0.166 0.252 0.365 0.525 1.374

23

Table 2 Average excess monthly returns and excess return spreads for market beta, firm size, and book-to-market ratio quintiles
The sample contains firms listed on TSE and TOTC for the period from July 1982 to June 2002. It consists of 63 firms in the first month and 584 firms in the final month. There are totally 4,307 firm-years and 51,684 return observations. The combined series of rediscounts rate and the 91-day T-bills rate in Taiwan as a risk-free rate. Excess returns are raw returns in excess of this risk-free rate. Portfolios are formed monthly. All firms are allocated to five portfolios based on their unadjusted beta ( ), adjusted beta ( k ), size, and book-to-market ratio (B/M). Panel A, B, C and D show the results for portfolios formed on , k , size and B/M, respectively. The F-values are computed under the null hypothesis that the mean excess returns on portfolios lowest through highest are jointly equal. Significance indicators: 1M (***), 2.5M (**), and5M (*).
All Low 2 3 4 High High-Low t-value Spread (Spread) F Value

Panel A: Portfolios sorted on All months January only January excludes CNY Except January CNY only CNY excludes January Except CNY All months January only January excludes CNY Except January CNY only CNY excludes January Except CNY
All months January only January excludes CNY Except January CNY only CNY excludes January Except CNY 1.083 9.648 9.484 0.305 5.662 3.531 0.667 1.012 7.147 8.197 0.445 3.441 2.674 0.783 1.046 7.104 8.191 0.493 3.931 3.436 0.782 1.018 9.105 9.369 0.289 5.217 3.561 0.643 1.138 11.506 10.531 0.201 7.303 4.255 0.583 1.201 13.364 11.120 0.095 8.408 3.728 0.546 0.189 6.217 2.923 -0.350 4.967 1.054 -0.237 0.72 5.16*** 1.93* -1.35 5.68*** 1.26 -0.87 0.124 6.131 0.860 0.528 8.649 0.754 0.200

Panel B: Portfolios sorted on k

1.037 5.359 6.368 0.658 0.956 2.785 0.865 0.803 7.345 8.005 0.391 3.939 2.902 0.509 0.820 8.276 8.170 0.468 5.392 3.862 0.396 1.144 12.388 12.201 0.652 7.112 4.325 0.617 1.611 14.854 12.658 1.073 8.899 3.778 0.948 0.574 9.495 6.290 0.415 5.943 0.993 0.083 2.19** 8.19*** 4.42*** 2.09** 6.72*** 1.21 0.31 1.995 12.712 3.936 2.174 10.509 1.045 0.918

Panel C: Portfolios sorted on firm size

2.167 14.267 16.384 1.055 6.434 4.708 1.767 0.997 10.408 11.214 0.139 5.934 4.510 0.546 0.896 8.921 8.724 0.166 5.303 3.320 0.495 0.533 8.063 6.765 -0.141 5.439 2.847 0.098 0.830 6.595 4.354 0.305 5.203 2.278 0.432 -1.337 -7.672 -12.030 -0.750 -1.231 -2.430 -1.335 -5.11*** -6.45*** -8.11*** -2.88*** -1.07 -2.91*** -4.88*** 10.249 12.056 21.273 5.152 0.577 2.840 9.749

Panel D: Portfolios sorted on B/M

All months January only January excludes CNY Except January CNY only CNY excludes January Except CNY 0.968 8.841 6.651 0.254 6.053 2.494 0.507 0.842 8.500 7.350 0.137 5.515 2.878 0.408 1.064 8.338 8.805 0.412 4.759 3.458 0.738 1.020 9.113 10.001 0.281 4.919 3.739 0.662 1.522 13.444 14.591 0.439 7.066 5.080 1.018 0.554 4.602 7.940 0.185 1.013 2.586 0.511 2.08** 3.64*** 5.15*** 0.70 1.07 2.98*** 1.85* 1.211 3.409 4.399 0.305 1.671 2.208 0.900

24

Table 3 Average slopes of monthly cross-sectional regressions of excess returns on unadjusted and adjusted market beta, firm size, and book-to-market ratio: July 1982 to June 2002
Excess returns are regressed month-by-month on the explanatory variables, unadjusted and adjusted market beta, firm size, and book-to-market ratio (B/M). A combined series of the rediscounts rate and the 91-day T-bills in Taiwan is used as a risk-free rate. Excess returns are stock raw returns in excess of this risk-free rate. Market beta is the estimated conditional beta as of the two months previous to excess returns. Firm size (ME) is measured as of the end of the second to last month. B/M is equal to book value of equity divided by the market value of equity as of the end of December of year t-1 and used to explain the excess returns from July of year t to June of year t+1. There are totally 240 months for full samples. OLS and GLS denote that coefficients are estimated from OLS and GLS regression, respectively. Ln(.) denotes natural log operator. and k denote the unadjusted and adjusted market beta, respectively. The t-statistics are in parentheses and is equal to the average regression coefficient divided by its time-series standard error. The numbers of positive regression coefficients are in bracket. Significance indicators: 1M (***), 2.5M (**), and 5M (*).
OLS estimates of average parameter values Intercept ln(ME) ln(B/M) k
1.410 (1.83) 0.912 (1.44) 3.566 (1.71) 1.242 (1.43) 2.770 (1.50) 2.451 (1.34) 0.655 (1.57) [115] 0.885 (2.01)** [122] -0.228 (-1.28) [116] -0.209 (-1.19) [117] 0.202 (0.47) [113] 0.734 (1.67)* [121] -0.207 (-1.11) [117] -0.073 (-0.18) [118] -0.232 (-0.67) [114] -0.128 (-0.37) [115]
Adj R
2

GLS estimates of average parameter values Intercept ln(ME) ln(B/M) k

1.390 (1.79) 0.840 (1.33) 3.509 (1.68) 1.223 (1.41) 2.619 (1.42) 2.375 (1.30) 0.657 (1.58) [115] 0.858 (1.97)** [122] -0.214 (-1.20) [114] -0.199 (-1.14) [115] 0.197 (0.46) [109] 0.772 (1.75)* [121] -0.202 (-1.08) [117] -0.029 (-0.07) [118] -0.229 (-0.66) [114] -0.082 (-0.24) [118]

Adj R 2

0.0143

0.0121

0.0172

0.0154

0.0472

0.0468

0.0394

0.0393

0.0850

0.0845

0.0890

0.0883

25

Table 4 Average slopes of monthly cross-sectional regressions of excess returns on market beta, firm size, and book-to-market ratio: January versus non-January months
Excess returns are regressed month-by-month on the explanatory variables, unadjusted and adjusted market beta, firm size, and book-to-market ratio (B/M). The market beta is the estimated conditional beta as of the two months previous to excess returns. Firm size (ME) is measured as of the end of the second to last month. BE/ME is equal to book value of equity divided by the market value of equity as of the end of December of year t-1 and used to explain the excess returns from July of year t to June of year t+1. There are 20 observations for January months and 220 observations for non-January months. OLS and GLS denote that coefficients are estimated from OLS and GLS regression, respectively. Ln(.) denotes natural log operator. and k denote the unadjusted and adjusted market beta, respectively. The t-statistics are in parentheses and is equal to the average regression coefficient divided by its time-series standard error. The numbers of positive regression coefficients are in bracket. Panel A shows the results for the January month only while Panel B shows the results for the non-January months. Significance indicators: 1M (***), 2.5M (**), and 5M (*).
OLS estimates of average parameter values Intercept ln(ME) ln(B/M) k
Adj R 2

GLS estimates of average parameter values Intercept ln(ME) ln(B/M) k

Adj R 2

Panel A: January only (20 observations)

3.186 (1.43) 2.033 (1.11) 19.130 (2.59) 6.971 (2.42) 13.770 (2.06) 12.574 (1.96) 4.102 (1.83)* [12] 5.419 (2.54)*** [15] -0.153 ] -0.36^ [114] 0.315
] 0.72^

4.113 (2.09)** [12] 5.341 (2.65)*** [16] -1.443 (-2.15)** [4] 1.643 (1.12) [12] 0.810 (0.63) [12] 1.035 (0.82) [11]

0.0289

3.112 (1.40) 2.023 (1.11) 18.722 (2.50) 6.959 (2.41) 13.853 (2.08) 12.521 (1.90)

4.159 (2.13)** [11] 5.322 (2.63)*** [17] -1.396 (-2.04)** [4] 1.687 (1.14) [12] 0.788 (0.60) [11] 1.072 (0.84) [11]

0.0288

00372

0.0372

0.0590

0.0588

0.0407

0.0406

-1.345 (-1.92)* [5] -1.334 (-2.01)** [6]

0.1156

3.997 (1.77)* [12] 5.212 (2.45)*** [14] -0.163 (-0.38) [98] 0.359 (0.82) [104]

0.1246

-1.350 (1.94)* [6] -1.316 (-1.93)* [6]

0.1152

0.1239

Panel B: Except January (220 observations)

1.249 ] 1.53^ 0.810
] 1.20^

0.0130

1.233 (1.50) 0.732 (1.09) 2.126 (0.99) 0.701 (0.77) 1.598 (0.84) 1.452 (0.77)

0.0127

0.0153

0.0152

[105] 2.151 ] 1.00^ 0.721 ] 0.79^ 1.770 ] 0.93^ 1.531

] 0.81^

-0.095
] -0.49^

0.0461

[113] -0.224
] -0.56^

-0.094 (-0.49) [113] -0.185 (-0.46) [106] 0.322 (-0.89) [103] -0.186 (-0.52) [107]

0.0459

0.0392

0.0391

0.342 ] 0.85^ [103] 0.473

] 1.10^

[107]

-0.126 -0.69^ ] [111] -0.106 -0.59^ ] [111]

[106] -0.327 -0.90^ ] [102] -0.234 -0.65^ ] [104]

0.0822

0.354 (0.88) [103] 0.462 (1.08) [108]

0.0858

-0.110 (-0.60) [108] -0.098 (-0.54) [111]

0.0817

0.0851

26

Table 5 Average slopes of monthly cross-sectional regressions of excess returns on market beta, firm size, and book-to-market ratio: Chinese New Year versus the non-CNY months
Excess returns are regressed month-by-month on the explanatory variables, unadjusted and adjusted market beta, firm size, and book-to-market ratio (B/M). Market beta is the estimated conditional beta as of the two months previous to excess returns. Firm size (ME) is measured as of the end of the second to last month. BE/ME is equal to book value of equity divided by the market value of equity as of the end of December of year t-1 and is used to explain the excess returns from July of year t to June of year t+1. There are 20 observations for Chinese New Year (CNY) months and 220 observations for non-CNY months. OLS and GLS denote that coefficients are estimated from OLS and GLS regression, respectively. Ln(.) denotes the natural log operator. and k denote the unadjusted and adjusted market beta, respectively. The t-statistics are in parentheses and is equal to the average regression coefficient divided by its time-series standard error. The numbers of positive regression coefficients are in bracket. Panel A shows the results for the CNY months only while Panel B shows the results for non-CNY months. Significance indicators: 1M (***), 2.5M (**), and 5M (*).
OLS estimates of average parameter values Intercept ln(ME) ln(B/M) k
Adj R
2

GLS estimates of average parameter values Intercept ln(ME) ln(B/M) k

Adj R 2

Panel A: Chinese New Year only (20 observations)

3.357 (1.73) 3.359
] 1.86^

3.555 (1.84)* [14] 3.503 (1.76)* [12] -0.361

] -0.63^

0.0224

3.280 (1.71) 3.242 (1.80) 9.223 (1.52) 7.737 (2.66) 5.473 (1.00) 4.822 (0.84)

3.625 (1.87)* [14] 3.570 (1.77)* [12] -0.332 (-0.57) [8]

0.0223

0.0339

0.0337

9.516 (1.60) 7.780 (2.68) 5.467 (1.03) 5.779 ] 1.05^ 3.692 (1.65)* [13] 3.429 ] 1.48^ [12] -0.102 ] -0.24^ [99] 0.482
] 1.09^

0.0456

0.0454

[8] 1.649 (1.67)* [12] 1.379 (1.76)* [12] 1.416 (1.75)* [15] 0.0302

-0.189
] -0.31^

0.0873

[9] -0.198 ] -0.32^ [10]

3.655 (1.61) [13] 3.388 (1.56) [12] -0.115 (-0.27) [95] 0.518 (1.17) [109]

0.0954

-0.263 (-0.42) [9] -0.159 (-0.27) [10]

1.679 0.0302 (1.71)* [11] 0.819 0.0870 (1.60) [12] 1.013 0.0949 (2.24)** [5] 0.0133

Panel B: Except Chinese New Year (220 observations)

1.233 ] 1.50^ 0.690
] 1.03^

0.0135

1.218 (1.47) 0.621 (0.93) 2.989 (1.35) 0.631 (0.70) 2.347 (1.20) 2.121 (1.10)

0.0156

0.0155

[109] 3.025 ] 1.37^ 0.648 ] -1.16^ 2.525 ] 1.29^ 2.696

] 1.34^

-0.193
] -0.98^

0.0473

[109] -0.229
] -0.55^

-0.190 (-0.97) [109] -0.185 (-0.44) [107] -0.378 (-1.01) [102] -0.236 (-0.64) [113]

0.0471

0.0402

0.0400

0.379 ] 0.94^ [102] 0.269

] 0.61^

[110]

-0.231 -1.24^ ] [107] -0.241 -1.24^ ] [107]

[106] -0.378 -1.02^ ] [102] -0.483 -1.30^ ] [100]

0.0848

0.386 (0.95) [102] 0.628 (1.44) [110]

0.0884

-0.215 (-1.15) [105] -0.206 (-1.12) [105]

0.0843

0.0877

27

Table 6 Average slopes of monthly cross-sectional regressions of excess returns on market beta, firm size, and book-to-market ratio: Pure Chinese New Year and January
Excess returns are regressed month-by-month on the explanatory variables, unadjusted and adjusted market beta, firm size, and book-to-market (B/M). Market beta is the estimated conditional beta as of the two months previous to excess returns. Firm size (ME) is measured as of the end of the second to last month. B/M is equal to book value of equity divided by the market value of equity as of the end of December of year t-1 and used to explain the excess returns from July of year t to June of year t+1. There are 20 observations for CNY months and January months. However, there are 6 January months are just CNY month simultaneously. These months are excluded from either regression analysis. OLS and GLS denote that coefficients are estimated from OLS and GLS regression, respectively. Ln(.) denotes the natural log operator. and k denote the unadjusted and adjusted market beta, respectively. The t-statistics are in parentheses and the numbers of positive regression coefficients are in bracket. Panel A shows the results for the pure CNY months only while Panel B shows the pure January months only. Significance indicators: 1M (***), 2.5M (**), and 5M (*).
OLS estimates of average parameter values Intercept ln(ME) ln(B/M) k
Adj R
2

GLS estimates of average parameter values Intercept ln(ME) ln(B/M) k

Adj R 2

Panel A: January only but exclude Chinese New Year (14 observations)
3.841 ] 1.31^ 2.621
] 1.13^

3.866 (1.95)* [8] 5.304 (2.96)*** [12] -2.464 (-4.14)*** [1] 2.589
] 1.33^

0.0147

3.775 (1.28) 2.681 (1.16) 28.393 (3.62) 7.413 (2.12) 23.324 (3.28) 22.631 (3.48)

3.902 (1.98)** [7] 5.260 (2.94)*** [12] -2.423 (-4.08)*** [1] 2.611 (1.34) [9] 0.781 (0.42) [9] 1.119 (0.62) [7]

0.0146

0.0137

0.0136

28.663
] 3.66^

0.0632

0.0630

7.449
] 2.13^

0.0475

0.0473

23.210 3.26^ ] 23.936

] 3.29^

5.088 (2.24)** [9] 5.565 (2.18)** [12] 3.070 ] 1.61^ [10] 2.680
] 1.59^

[9] -0.468 0.828 (-4.06)*** ] 0.46^ [1] [9] -2.622 0.312 (-4.02)*** ] 0.17^ [2] [7]

0.1158

4.920 (2.09)** [9]

0.1170

-2.477 (-4.08)*** [1] 5.641 -2.447 (2.93)*** (-4.17)*** [11] [2]

0.1152

0.1161

Panel B: Chinese New Year but exclude January (14 observations) 4.085 ] 1.65^ 4.515
] 2.05^

0.0053

4.015 (1.64) 4.423 (2.00) 14.792 (2.42) 8.525 (2.42) 11.563 (2.08) 12.126 (2.17)

3.140 (1.63) [10] 2.757 (1.60) [8] -0.904 (-1.72)* [5]

0.0052

0.0090

0.0086

[8] 14.924 2.44^ ] 8.606

] 2.45^

-0.919 (-1.75)* [5] 2.597 (2.27)** [9] 1.641 ] 1.58^ [9] 1.416 (1.75)* [11]

0.440

0.0439

0.0325

11.349
] 2.09^

4.502 (1.97)** [10] 3.429 ] 1.48^ [9]

-0.817
] -1.42^

0.0753

5.779 ] 1.05^

[5] -0.198 ] -0.32^ [6]

4.408 (1.96)* [10] 3.029 (1.60) [9]

0.0954

-0.839 (-1.41) [4] -0.744 (-1.46) [6]

2.598 0.0324 (2.32)** [8] 1.665 0.0749 (1.65)* [10] 1.900 0.0747 (1.92)* [11]

28

29