Seelanatha, LalithKulendran, NadaAlshaikhmubarek, Asim2024-12-182024-04https://hdl.handle.net/20.500.14154/74323The recent reformation and globalisation of the Saudi stock market have underscored the necessity of investigating the patterns that drive market returns, with factor premiums and asset pricing models serving as crucial analytical tools for this purpose. Therefore, this study examines whether the Fama and French (2015) five-factor model (FF5FM) provides a better explanation for the cross-section of stock returns than the Fama and French (1992) three-factor model (FF3FM), and whether the factors utilised in these asset pricing models have a significant premium in the Saudi stock market. Furthermore, this study introduces a new factor, the Islamic premium, to the Fama and French asset pricing models and examines whether this factor has a significant premium or enhances the models’ ability to describe the variation in average returns. The research also investigates whether the recent global market integration has altered the significance of the factor premiums and the explanatory power of asset pricing models. Finally, to understand the market behaviour during crises, the impact of COVID-19 on stock performance and factor premiums is analysed. A one sample t-test is employed first to examine the significance of all factor premiums. Then, the GRS test for portfolio efficiency is used to compare the performance of the asset pricing models and to identify the most effective model based on the lowest GRS value. Then, this study divides the sample period into two subperiods – pre- and post-global integration – to assess the significance of the factor premiums (using a one-sample t-test) and the performance of the asset pricing models (using the GRS test) in each subperiod. Additionally, a two-sample t-test is conducted to ascertain any significant changes in the factor premiums, and robustness checks are performed using monthly/weekly returns and value-weighted/equal-weighted portfolios across all the methods applied in this study. Finally, panel regression analysis and the Wald test are used to examine the implications of COVID-19 on the performance of stocks in the market. This study finds that the value premium is the only factor that has a significant equity premium across all the examined portfolios. This indicates that future investors in the Saudi stock market could generate higher returns if they invest in stocks with a higher B/M ratio. However, the study also finds that the inverse of the investment premium is significant, which means the stocks with higher investment growth have a significant equity premium. This may be attributed to investors’ potential overreaction to positive news, such as investment growth, and herding behaviour. The study further finds that Fama and French’s FF5FM generally outperforms FF3FM, particularly when using factors constructed from the 2 × 3 sort. Conversely, when employing factors from the 2 × 2 sort, the Islamic premium notably enhances the explanatory power of FF5FM and FF3FM. The study finds evidence that the size effect started to reappear in the market after global integration. More substantial evidence shows that the value premium emerged following changes in market demographics. On the other hand, the inverse of the investment premium was significant before global integration but has disappeared since then. These findings show that after market reforms, investors in the Saudi market have made more informed investment decisions and paid more attention to factor premiums. The study also found that the best asset pricing model for describing variation in the cross-section of stock returns differed before and after the global market integration. From 2018 onward, incorporating Islamic premiums have improved the explanatory power of the Fama and French asset pricing models. Additionally, value-weighted portfolios always give higher returns than equal-weighted portfolios. This could be due to the poor performance of smaller stocks and higher exposure to larger stocks in value-weighted portfolios. Finally, there is evidence that Islamic and less profitable stocks performed poorly compared to non-Islamic and more profitable stocks during the COVID-19 crisis, most likely due to liquidity challenges. Most firms experienced a revenue decline during COVID-19, particularly stocks with low profitability, as they already had cash flow issues. However, the limited financial sources available to Islamic stocks compared to non-Islamic stocks worsened their liquidity position and made them more vulnerable.287enAsset Pricing ModelGlobal IntegrationSaudi Stock MarketFactor PremiumsCOVID-19Stock ReturnsThesis