Asset Pricing and Cost of Equity in the Tunisian Banking Sector: Panel Data Evidence

Abstract

In spite of popularity and theoretical simplicity of the one-factor CAPM used in the valuation of financial assets, more attention is now made to the important extension proposed by Fama and French [1993] rising the Three-Factor Pricing Model (TFPM). Alongside beta, average stock returns could be explained by some size and book-to-market supplementary effects. With these two complementary models, estimation of cost of equity is carried out for the Tunisian banking sector. To account for inter-individual heterogeneity, estimation of the coefficients is conducted according to random-coefficient specifications within the context of panel data analysis.

Keywords: cost of equity, CAPM, TFPM, banking sector, random-coefficient model