The role of efficiency in capital asset pricing: a research on Nasdaq technology sector

Purpose The aim of this study is to investigate the role of efficiency in capital asset pricing. The paper explores the impact of a four-factor model that involves an efficiency factor on the returns of Nasdaq technology firms. Design/methodology/approach The paper relies on data of 147 firms from July 2007 to June 2017 to examine the impact of efficiency on stock returns. The performances of the capital asset pricing model (CAPM), Fama–French three-factor model and the proposed four-factor model are evaluated based on the time series regression method. The parameters such as the GRS F -statistic and adjusted R ² are used to compare the relative performances of all models. Findings The results show that all factors of the models are found to be valid in asset pricing. Also, the paper provides evidence that the explanatory power of the proposed four-factor model outperforms the explanatory power of the CAPM and Fama–French three-factor model. Originality/value Unlike most asset pricing studies, this paper presents a new asset pricing model by adding the efficiency factor to the Fama–French three-factor model. It is documented that the efficiency factor increases the predictive ability of stock returns. Evidence implies that investors consider efficiency as one of the main factors in pricing their assets.