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Abstract:
Background -
The based model of asset pricing, CAPM, only considers the surrounding factors of the asset. It omits the internal factors of the asset itself. Some scholars only consider the one factor which contributes to the asset pricing; it could be the Size or Earning Price Ratio or Leverage or other financial factors. Empirically, the asset pricing model combines the financial factors into the asset pricing and it has not considered the leverage as one of the financial factors all together.
Purpose -
The study adds the leverage into empirical model of asset pricing together with other financial factors i.e. Size, Book to Market, Operating Profit, and Investment. The excess return is considered as a proxy of asset pricing and its value will be assessed by all the factors proxied in the model.
Design/Method/Approach -
Data used in this study is monthly adjusted prices and other financial factors of all stock listed in the Indonesian Market from the period of 2006 to 2015. The examination of all financial factors proxied in this model empirically has been done by having the stationary test and statistical relationship among the excess return and the factors. It will be used the portfolio approach to examine the relationship among them since the surrounding factors are better represent the asset pricing.
Findings -
The finding suggests that all the financial factors involved in the empirical asset pricing have contributed to the empirical asset pricing and all the factors of asset pricing have different characteristic in influencing the excess return of the portfolios in general and in diversified approach.
Research Limitations -
The study has been done in Indonesian Market only and it used the financial report of each firms in the market as the main data resource. The study does not consider the financial institutions since they might have different composition of leverage compare to other firms, and they might bias the results of study.
Originality/Value -
This empirical study has been done in Indonesia and considers the leverage as additional factors of the asset pricing factors together with other asset pricing factors of asset pricing. The leverage as the single factor has been considered as important factors for asset pricing however how far the leverage contribute to asset pricing compares to other financial factors has not examined yet.
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