Risk and return in the Thai stock market from 1990 to 1999

This dissertation examines the relationship between risk and returns of Thai common stock, and then elucidates the major factors affecting these returns. It has four purposes: (1) To examine and explain whether a relationship exists between risk and Thai stock returns under the CAPM theory or not. (2) To find out whether size and book-to-market ratio capture the cross-sectional variation in average Thai stock returns or not. (3) To determine whether the foreign exchange rate and interest rate represent main factors of variation in average Thai stock returns or not. (4) To investigate whether US and Japanese stock markets represent factors of variation in average Thai stock returns or not.; After examining these four issues, the study explores whether Thai stock returns are normally distributed using time-series data from the Stock Exchange of Thailand (SET) index and common stocks. The sample period stretches from January 1990 to December 1999; for each month during this period, it looks at the SET index, common listed stocks, book-to-market ratio, size, the S&P 500 index, the Nikkei 225, and the interest and foreign exchange rates. The London InterBank Offering Rate (LIBOR) is the interest rate used in the analysis. Time-series data of the foreign exchange rate of the US dollar and Thai Baht are also used in the analysis.; The dissertation uses the Fama and MacBeth (1973) methodology to test the relationship of risk and Thai stock returns under the CAPM theory. This methodology has been employed to determine which of the above-mentioned factors capture the cross-sectional variation in average stock returns. The Thai economic crisis also had an impact on stock prices. The study divides data for the 10-year sampling period (01/90–12/99) into three sub-periods: early years (01/1990–12/1993), uncertain years (01/94–06/97) and years after the economic crisis (07/97–12/99). It finds a relationship between risk and Thai stock returns before and after the economic crisis under the CAPM theory. It also reports that book-to-market ratio, size and the interest rate fail to explain the cross-sectional variation in Thai stock returns either before or after the economic crisis.; Our findings in Period 3 (Years after Thai Economic Crisis) indicate that the foreign exchange rate affected Thai stock returns after the government changed its exchange rate policy. The last finding is that the S&P 500 and Nikkei 225 fail to explain SET stock returns. The analysis of stock return distributions yielded different results for each testing period and indicated that the SET index and Thai stock returns might not be normally distributed.