Stock Return Variations: The Validity of Systemic Risk, Size and Valuation as Explanatory Variables in the Lebanese Stock Market

Abstract

Understanding stock return variations and accounting for their drivers help academics and practitioners estimate expected returns and gauge risk exposures, thereby optimizing investment strategies. This paper seeks to study the effect of systemic risk, size and valuation on stock return, in the Lebanese stock market. The research design and methodology are the Fama French Factor Model (FFFM) as developed by Fama and French in their seminal work of 1993. The research demonstrates validity of the three variables in question, and that is consistent with results obtained for global equity markets. However, the results exhibit a negative market risk premium with respect to US T-bills, and a high level of factor inter-correlation for the period in question.