The Impact of Company Characteristics on Return Volatility in Sorted Portfolios: A Hybrid Asymmetric Conditional Variance Approach

Document Type : Original Article

Authors

• Seyed Kazem Ebrahimi
• Mahnaz Khorasani
• Mina Saba

Financial Engineering, Faculty of Economics, Management and Administrative Sciences, Semnan University, Semnan, Iran

10.22067/ijaaf.2024.45105.1433

Abstract

The primary objective of this study is to investigate how various stock portfolio strategies affect the volatility of returns among companies listed on the Tehran Stock Exchange (TSE). A systematic elimination method selected 185 companies from 2011 to 2022. The return volatility of these companies, along with the stability of fluctuations, was analyzed across 16 sorted portfolios based on three characteristics: size, book-to-market (B/M) ratio, and financial leverage. Additionally, considering the leveraged structure of companies’ balance sheets, the extent of the leverage effect was examined in relation to the impact of positive and negative news on return fluctuations. The hybrid model ARMA(p, q)-GJR-GARCH(1, 1)-M was utilized to investigate this. The findings indicate that the volatility of returns and the stability of fluctuations within sorted portfolios vary across different groups. Furthermore, the influence of positive news on stock return volatility appears to be more pronounced in two specific portfolios: one consisting of large companies with a high B/M ratio and the other comprised of large companies with a low B/M ratio, compared to the impact of negative news. This disparity may be attributed to the dissemination of positive news within the market, wherein larger companies with low B/M ratios, due to their higher growth potential, and larger companies with high B/M ratios, due to their substantial capital and stable financial performance, have a greater impact on market expectations, thereby enhancing investor confidence.

Keywords

• Firm Value
• Financial Leverage
• Hybrid Asymmetric Conditional Variance
• Return Volatility

Main Subjects

• Accounting

---

©2024 The author(s). This is an open access article distributed under Creative Commons Attribution 4.0 International License (CC BY 4.0)

References

1. Ahmed, Z. and Hla, D. T. (2019). Stock return volatility and capital structure measures of nonfinancial firms in a dynamic panel model: Evidence from Pakistan. International Journal of Finance & Economics, 24(1), pp. 604-628. https://doi.org/10.1002/ijfe.1682
2. Al-Slehat, Z. A. F., Zaher, C. and Fattah, A. (2020). Impact of financial leverage, size, and assets structure on firm value: Evidence from industrial sector, Jordan. International Business Research, 13(1), pp. 109-120. DOI:10.5539/ibr.v13n1p109
3. Asyik, N. F., Agustia, D. and Muchlis, M. (2023). Valuation of financial reporting quality: is it an issue in the firm’s valuation?. Asian Journal of Accounting Research, (ahead-of-print). https://doi.org/10.1108/AJAR-08-2022-0251
4. Bhowmik, R. and Wang, S. (2020). Stock market volatility and return analysis: A systematic literature review. Entropy, 22(5), p. 522. https://doi.org/10.3390/e22050522
5. Bollerslev, T. (1986). Generalized autoregressive conditional heteroskedasticity. Journal of Econometrics, 31(3), pp. 307-327. https://doi.org/10.1016/0304-4076(86)90063-1
6. Box, G. E., Jenkins, G. M., Reinsel, G. C. and Ljung, G. M. (2015). Time series analysis: forecasting and control. John Wiley & Sons, U.S. https://www.scirp.org/reference/ReferencesPapers?ReferenceID=1969833
7. Brooks, C. (2014), Introductory econometrics for Finance (3rd.), New York: Cambridge University Press, New York. https://doi.org/10.1017/CBO9781139540872
8. Cenesizoglu, T. (2011). Size, book-to-market ratio and macroeconomic news. Journal of Empirical Finance, 18(2), pp. 248-270.
9. Chen, J., Chollete, L. and Ray, R. (2010). Financial distress and idiosyncratic volatility: An empirical investigation. Journal of Financial Markets, 13(2), pp. 249-267. https://doi.org/10.1016/j.finmar.2009.10.003
10. Christie, A. A. (1982). The stochastic behavior of common stock variances: Value, leverage, and interest rate effects. Journal of Financial Economics, 10(4), pp. 407-432.https://doi.org/10.1016/0304-405X(82)90018-6
11.Ehrmann, M. and Fratzscher, M. (2004). Taking stock: Monetary policy transmission to equity markets. Journal of Money, Credit and Banking, 36, pp. 719-737. https://www.jstor.org/stable/3839039
12.Engle, R. F. (1982). Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica: Journal of the econometric society, 987-1007. https://doi.org/10.2307/1912773
13. Engle, R. F. and Ng, V. K. (1993). Measuring and testing the impact of news on volatility. The Journal of Finance, 48(5), pp. 1749-1778. https://doi.org/10.1111/j.15406261.1993.- tb05127.x
14. Fama, E. F. and French, K. R. (2015). A five-factor asset pricing model. Journal of financial economics, 116(1), pp. 1-22. https://doi.org/10.1016/j.jfineco.2014.10.010

15. Fama, E. F. and French, K. R. (2018). Choosing factors. Journal of financial economics, 128(2), 234-252. https://doi.org/10.1016/j.jfineco.2018.02.012
16. Friedmann, R. and Sanddorf-Köhle, W. G. (2002). Volatility clustering and nontrading days in Chinese stock markets. Journal of Economics and Business, 54(2), pp. 193-217. https://doi.org/10.1016/S0148-6195(01)00062-5
17.Ghasemzadeh, M., Heydari, M., and Mansourfar, G. (2021). Earning volatility, capital structure decisions and financial distress by SEM. Emerging Markets Finance and Trade, 57(9), pp. 2632-2650. https://doi.org/10.1080/1540496X.2019.1663729
18. Glosten, L. R., Jagannathan, R. and Runkle, D. E. (1993). On the relation between the expected value and the volatility of the nominal excess return on stocks. The Journal of Finance, 48(5), pp. 1779-1801. https://doi.org/10.1111/j.1540-6261.1993.tb05128.x
19. Grachev, O. Y. (2017). Application of time series models (ARIMA, GARCH, and ARMA-GARCH) for stock market forecasting. Northern Illinois University, DeKalb, United States. https://huskiecommons.lib.niu.edu/studentengagement-honorscapstones/177
20. Ibhagui, O. W. and Olokoyo, F. O. (2018). Leverage and firm performance: New evidence on the role of firm size. The North American Journal of Economics and Finance, 45, pp. 57-82. https://doi.org/10.1016/j.najef.2018.02.002
21. Kashyap, S. (2023). Review on volatility and return analysis including emerging developments:evidence from stock market empirics. Journal of Modelling in Management, 18(3), pp. 756-816. https://doi.org/10.1108/JM2-10-2021-0249
22. Kontonikas, A. and Kostakis, A. (2013). On monetary policy and stock market anomalies. Journal of Business Finance & Accounting, 40(8), pp. 1009-1042. https://doi.org/10.1111-/jbfa.12028
23. Krause, T. A. and Tse, Y. (2016). Risk management and firm value: recent theory and evidence. International Journal of Accounting and Information Management, 24(1), pp. 56-81. https://doi.org/10.1108/IJAIM-05-2015-0027
24. Lam, K. S. (2002). The relationship between size, book-to-market equity ratio, earnings–price
ratio, and return for the Hong Kong stock market. Global finance journal, 13(2), pp. 163-179.
https://doi.org/10.1016/S1044-0283(02)00049-2
25. Li, X., Brooks, C. and Miffre, J. (2009). The value premium and time‐varying volatility. Journal of Business Finance & Accounting, 36(9‐10), pp. 1252-1272. https://doi.org/10.1111/j.1468-5957.2009.02163.x
26. Liu, H. and Shao, S. (2016). India’s tea price analysis based on ARMA model. Modern Economy, 7(2), pp. 118-123. https://doi.org/10.4236/me.2016.72014
27. Manzoor, D. and Yadi-Poor, M. (2016). Evaluation and Prediction of Price Fluctuations in the Iranian Electricity Market Using the ARMAX-GARCH Model. Quantitative Economics Quarterly, 13(1), pp. 97-117. (In Persian). https://doi.org/10.22055/jqe.2016.12328
28. Mehrara, M. and Abdoli, G. (2006). The Asymmetry of Stock Market Volatility: The Case of Iran. Iranian Journal of Economic Research, 8(26), pp. 25-40. https://ijer.atu.ac.ir/article_3706.html?lang=fa
29. Mirzaei, K., Fotouh Abadi, V. and Nosratabadi, J. (2019). Investigating the Factors Affecting Bitcoin Fluctuations and the Inherent Financial Risks in Cryptocurrencies Using the GARCH Model (1,1). Defense Economics, 3(10), pp. 131-148. (In Persian). https://doi.org/20.1001.1.25382454.1397.3.10.6.6
30. Modigliani, F., and Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48(3), pp. 261-297. https://www.jstor.org/stable/1809766
31. Nelson, D. B. (1991). Conditional heteroskedasticity in asset returns: A new approach. Econometrica: Journal of the econometric society, 59(2), pp. 347-370. https://doi.org/10.2307/2938260
32. Nourahmadi, M. and Sadeqi, H. (2023). Portfolio Diversification Based on Clustering Analysis. Iranian Journal of Accounting, Auditing and Finance, 7(3), pp. 1-16. https://doi.org/10.22067/ijaaf.2023.43078.1092
33. Nugroho, B. Y. (2020). The effect of book to market ratio, profitability, and investment on stock return. International Journal Of Economics And Management Studies, 7(6), pp. 102-107. https://doi.org/10.14445/23939125/IJEMS-V7I6P114
34. Nukala, V. B. and Prasada Rao, S. S. (2021). Role of debt-to-equity ratio in project investment valuation, assessing risk and return in capital markets. Future Business Journal, 7(1), p. 13. https://doi.org/10.1186/s43093-021-00058-9
35. Otaify, M. (2020). Modeling volatility of size, value and financial leverage‐sorted portfolios: Evidence from Egyptian stock exchange. Journal of Public Affairs, 22(2), A. e2369. https://doi.org/10.1002/pa.2369
36. Park, H. (2019). An intangible-adjusted book-to-market ratio still predicts stock returns. Critical Finance Review, 25(1), pp. 207-236. https://cfr.pub/forthcoming/papers/park2019intangible.pdf
37. Pätäri, E., Ahmed, S., Luukka, P. and Yeomans, J. S. (2023). Can monthly-return rank order reveal a hidden dimension of momentum? The post-cost evidence from the US stock markets. The North American Journal of Economics and Finance, 65, A. 101884. https://doi.org/10.1016/j.najef.2023.101884
38. Pontiff, J. and Schall, L. D. (1998). Book-to-market ratios as predictors of market returns. Journal of financial economics, 49(2), pp. 141-160. https://doi.org/10.1016//S0304-405X(98)00020-8
39. Ramezani Sharif Abadi, M., Aliahmadi, S., Aghabeikzadeh, M. (2022). The effect of Size, Value and Idiosyncratic Risk Anomalieson the Relationship between Tail Risk and Stock Excess Returns. Iranian Journal of Accounting, Auditing and Finance, 6(1), pp. 77-90. https://doi.org/10.22067/ijaaf.2022.41544
40. Rønold, A. H. and Hausken, F. O. H. (2018). A Dynamic ARMA-GARCH Model: Forecasting Returns and Trading at the Oslo Stock Exchange, Master's thesis, NTNU, Trondheim, Norway. http://hdl.handle.net/11250/2573100
41. Rutkowska-Ziarko, A. (2015). The influence of profitability ratios and company size on profitability and investment risk in the capital market. Folia Oeconomica Stetinensia, 15(1), pp. 151-161.https://doi.org/10.1515/foli-2015-0025
42. Shin, H. H. and Stulz, R. M. (2000). Firm value, risk, and growth opportunities. Dice Center Working Paper No. 2000-8, Available at SSRN. https://dx.doi.org/10.2139/ssrn.234344
43. Tahir, S. H., Sabir, H. M., Alam, T. and Ismail, A. (2013). Impact of firm's characteristics on stock return: a case of non-financial listed companies in Pakistan. Asian Economic and Financial Review, 3(1), pp. 51-61. https://archive.aessweb.com/index.php/5002/arti-article/view/972
44. Vithessonthi, C. and Tongurai, J. (2015). The effect of firm size on the leverage–performance relationship during the financial crisis of 2007–2009. Journal of Multinational Financial Management, 29, pp. 1-29. https://doi.org/10. 1016/j.mulfin. 2014.11.001
45. Vo, X. V. (2015). Foreign ownership and stock return volatility–Evidence from Vietnam. Journal of Multinational Financial Management, 30, pp. 101-109. https://doi.org/10.1016/j.mulfin.2015.03.004

 

RESEARCH ARTICLE 88
Seyed Kazem Ebrahimi et al. IJAAF; Vol. 8 No. 4 Autumn 2024, pp: 71-88
46. Vo, X. V. (2016). Does institutional ownership increase stock return volatility? Evidence from
Vietnam. International Review of Financial Analysis, 45, pp. 54-61.
https://doi.org/10.1016/j.irfa.2016.02.006
47. Vuong, G. T. H. and Nguyen , M. H. (2024). Firm value, stock return volatility, and growth
opportunity: Insight from an emerging market, The International Conference on Accounting and
Financial Economics.14(1), pp. 100-118. https://www.researchgate.net/publication/378179986
48. Vuong, G. T. H., Van Nguyen, P., Barky, W. and Nguyen, M. H. (2024). Stock return volatility
and financial distress: Moderating roles of ownership structure, managerial ability, and financial
constraints. International Review of Economics & Finance, 91, pp. 634-652.
https://doi.org/10.1016/j.iref.2024.01.054
49. Zabol, M. A. and Abounoori, E. (2020). Evaluation of RGARCH Model to Estimate the
Conditional Variance of Tehran Stock Exchange Index. Journal of Investment Knowledge, 9(33),
pp. 129-145 ( In Persian). https://jik.srbiau.ac.ir/article_12379.html?lang=fa