Volatility and return analysis of North American agricultural food companies: a comparative study of capital asset pricing and Fama-French three-factor

Purpose This study examines the volatility of stocks of agricultural food companies in North America by analyzing the effectiveness of the Capital Asset Pricing Model (CAPM) and the Fama-French Three-Factor Model (FF3FM) in explaining observed returns. The goal is to determine which model more effectively captures the impacts of market conditions and whether company size and value have a greater influence on the excess returns of agricultural food companies. The findings aim to support investors in assessing these stocks of agricultural food companies and making informed decisions. Design/methodology/approach The study utilizes monthly data from 2007 to 2020 for agricultural food companies. Six portfolios are formed based on the market size and value of these companies. Regression analysis was conducted to compare the CAPM and FF3FM, with a focus on the size effect, value effect, and systematic risk. Findings The analysis reveals varying levels of stock volatility across the portfolios of agricultural food companies. The results show that while the FF3FM provides an improved fit relative to the CAPM, neither model fully explains excess returns. The findings highlight how size and value factors operate within the agricultural food sector, providing sector-specific insights into the pricing of systematic and idiosyncratic risks. The study emphasizes the superior returns of small and high book-to-market portfolios, as well as the effects of the size and value. Research limitations/implications The study period includes two major episodes of market stress: the 2008 global financial crisis and the first wave of the COVID-19 pandemic, which may have influenced the estimated return and risk relationships. Although diagnostic tests were conducted to verify the validity of the regression models, crisis-specific analyses, such as the inclusion of crisis-period dummy variables, subperiod estimations, or sensitivity analyses excluding crisis years, were beyond the scope of the present study. Future research could incorporate these approaches to better isolate the effects of extreme market events on the risk-return dynamics of agricultural food companies. Originality/value This paper is particularly important due to the scarcity of literature on the risk and return dynamics of the agricultural food sector in North America. It highlights the significance of size and value factors when considering these companies' stocks as part of a diversification strategy.