Test the Modified Multifactor Asset Pricing Model to Predict Stock Returns

An Applied Study in the Iraqi Stock Exchange for the Period (July 2006 – June 2021)

Thesis Submitted

to the Council of the College of Administration and Economics, Kerbala University, in Fulfillment of the Requirements for Master’s degree in Finance and Banking

By

Saja Muhammad Ayoub Al-Khafaji

Supervision By

Assistant professor Doctor Ali Ahmed Fares

This study aims to test the predictive ability of the French Fama model – the five-factor adjusted to the inflation factor of stock returns in the Iraqi stock market and the extent to which the model can be applied in the market. Volume premium (SMB), value premium (HML), operating profit premium (RMW), investment premium (CMA), inflation I) as independent variables. Equity portfolios have been created based on the Fama-French (2014) approach, using the annual screening procedure (2×2).

In order to test the predictive ability of the modified multi-factor asset pricing model, it was applied to the study sample, which was represented by (33) companies out of (130) companies listed on the Iraqi Stock Exchange for the period from July 2006 until June 2021, which were selected according to specific conditions. In order to achieve the goal of the study and test its hypotheses, some financial methods were used, as well as the use of the multiple regression model through the Excel-v16 program. Accordingly, the study concluded a number of conclusions, perhaps the most important of which are: The ability of the modified multi-factor asset pricing model in predicting stock returns was clarified in the values ​​of the square root of the mean squares of errors, and the study came out with a number of recommendations, the most important of which are: applying the modified multi-factor asset pricing model in the Iraqi Stock Exchange to determine the required rate of return on investment.

Keywords: Asset pricing, Fama and French five-factor model, Inflation rate.