scholarly journals Three-Factor and Five-Factor Models: Implementation of Fama and French Model on Market Overreaction Conditions

2018 ◽  
Vol 3 (4) ◽  
pp. 77-83
Author(s):  
Ferikawita M. Sembiring
Keyword(s):  
Asset Pricing ◽  
Firm Size ◽  
Firm Value ◽  
Factor Model ◽  
Five Factor Model ◽  
Portfolio Returns ◽  
Fama And French ◽  
Fama And French Model ◽  
Three Factor ◽  
French Model

Objective - Previous research by this author has stated that the market overreaction phenomenon occurs in the Indonesian capital market and the CAPM (Capital Asset Pricing Model) is able to explain portfolio returns. However, CAPM is still debated along with the emergence of the other asset pricing models, such as the multifactor model proposed by Fama and French. The aim of this research is to test the ability of that model to explain the returns of portfolios formed under market overreaction conditions. Methodology/Technique - The data used in this study is the same as that of the previous research, which includes winner and loser portfolio data formed in market overreaction conditions, particularly on the Indonesian Stock Exchange, between July 2005 and December 2015. The multifactor models used include a three-factor model consisting of the factors of market, firm size, firm value, and a five-factor model with the added factors of profitability and investment. To obtain more accurate results, GARCH econometric models were also used in addition to standard test models for obtaining unbiased results. Findings - This research concludes that market factors (Rm-Rf), firm size (SMB), and firm value (HML), are able to explain the winner and loser portfolio returns well. However, when the factors of profitability (RMW) and investment (CMA) are added into the three-factor model, the RMW and CMA explained the returns negatively and inconsistently when the GARCH model is implemented. Novelty – These results imply that the three-factor model is more accurate than the five-factor model, contrary to the previous findings of Fama and French. Type of Paper - Empirical. Keywords: Fama and French Model; Five-factor Model; Market Overreaction; Three-factor Model; Portfolio. JEL Classification: G11, G12, G14

scholarly journals A Comparative Study between the Fama and French Three-Factor Model and the Fama and French Five-Factor Model: Evidence from the Egyptian Stock Market

2019 ◽  
Vol 12 (1) ◽  
pp. 52 ◽  
Author(s):  
Nada S. Ragab ◽  
Rabab K. Abdou ◽  
Ahmed M. Sakr
Keyword(s):  
Asset Pricing ◽  
Stock Market ◽  
Factor Model ◽  
Five Factor Model ◽  
Pricing Models ◽  
Asset Pricing Models ◽  
Time Period ◽  
Model Evidence ◽  
Fama And French ◽  
Three Factor

The focus of this paper is to test whether the Fama and French three-factor and five factor models can capture the variations of returns in the Egyptian stock market as one of the growing emerging markets over the time-period July 2005 to June 2016. To achieve this aim, following Fama and French (2015), the authors construct the Fama and French factors and three sets of test portfolios which are: 10 portfolios double-sorted on size and the BE/ME ratio, 10 portfolios double-sorted on size and operating profitability, and 10 portfolios double-sorted on size and investment for the Egyptian stock market. Using time-series regressions and the GRS test, the results show that although both models cannot be rejected as valid asset pricing models when applied to portfolios double-sorted on size and the BE/ME ratio, they still leave substantial variations in returns unexplained given their low adjusted R2 values. Similarly, when the two models are applied to portfolios double-sorted on size and investment, the results of the GRS test show that both models cannot be rejected. However, when the two models are applied to portfolios double-sorted on size and operating profitability, the results of the GRS test show that both models are strongly rejected which imply that both models leave substantial variations in returns related to size and profitability unexplained. Specifically, the biggest challenge to the two models is the big portfolio with weak profitability which generate a significantly negative intercept implying that the models overestimate its return.

scholarly journals Analisis Three Factor Fama and French Model terhadap Return pada Indeks Saham Syariah Indonesia (ISSI) Periode 2011-2014

2020 ◽  
Vol 3 (2) ◽  
pp. 105
Author(s):  
Esi Fitriani Komara ◽  
Erie Febrian ◽  
Mokhamad Anwar
Keyword(s):  
Firm Size ◽  
Stock Prices ◽  
Sampling Technique ◽  
Market Returns ◽  
Purposive Sampling ◽  
Panel Data Regression ◽  
Fama And French ◽  
Fama And French Model ◽  
Three Factor ◽  
French Model

Abstract: 3FF is a better model than CAPM. But this model is still new, so it still needs empirical evidence. Then this model still needs to be proven in Indonesia. ISSI consists of all Indonesian sharia shares listed on the IDX and DES. So the purpose of this study was to analyze the three FF factors on return on ISSI. The sampling technique is purposive sampling so that 142 issuers are obtained. This research method is an associative quantitative study using panel data regression in data processing. The research results partially market returns affect the return, while firm size and BE / ME do not affect the return. However simultaneously the three FF factors can influence the return. This shows that the three FF factors can estimate return on ISSI. So that suggestions for companies that are sampled always improve the company's financial performance in order to increase the value of the company so that stock prices are high. Keywords: Three Factor Fama and French Model Abstrak: 3FF merupakan model yang lebih baik dibandingkan CAPM. Tetapi model ini masih baru, sehingga masih perlu bukt-bukti empiris. Kemudian model ini masih perlu dibuktikan di Indonesia. ISSI terdiri dari seluruh saham syariah Indonesia yang tercatat di BEI dan DES. Sehingga Tujuan penelitian ini adalah untuk menganalisis ketiga factor FF terhadap return pada ISSI. Teknik pengambilan sampelnya  yaitu purposive sampling sehingga diperoleh 142 emiten. Metode penelitian ini adalah penelitian kuantitatif asosiatif dengan mengunakan regresi data panel dalam pengolahan datanya. Hasil penelitian secara parsial return market berpengaruh terhadap return, sedangkan firm size dan BE/ME tidak berpengaruh terhadap return. Walaupun demikian secara simultan ketiga factor FF dapat berpengaruh terhadap return.  Hal tersebut menunjukan bahwa tiga factor FF dapat mengestimasi return di ISSI. Sehingga saran bagi perusahaan yang dijadikan sampel selalu meningkatkan kinerja keuangan perusahaan agar dapat meningkatkan nilai perusahaan sehingga harga saham tinggi.  Katakunci: Model Tiga Faktor Fama and French  

scholarly journals Modelos de Precificação de Ativos e o Efeito Liquidez: Evidências Empíricas no Mercado Acionário Brasileiro

2011 ◽  
Vol 9 (3) ◽  
pp. 383 ◽  
Author(s):  
Márcio André Veras Machado ◽  
Otávio Ribeiro de Medeiros
Keyword(s):  
Asset Pricing ◽  
Stock Returns ◽  
Factor Model ◽  
Five Factor Model ◽  
Explanatory Power ◽  
Liquidity Premium ◽  
Pricing Models ◽  
Portfolio Returns ◽  
Asset Pricing Models ◽  
Three Factor

This paper is aims to analyze whether a liquidity premium exists in the Brazilian stock market. As a second goal, we include liquidity as an extra risk factor in asset pricing models and test whether this factor is priced and whether stock returns were explained not only by systematic risk, as proposed by the CAPM, by Fama and French’s (1993) three-factor model, and by Carhart’s (1997) momentum-factor model, but also by liquidity, as suggested by Amihud and Mendelson (1986). To achieve this, we used stock portfolios and five measures of liquidity. Among the asset pricing models tested, the CAPM was the least capable of explaining returns. We found that the inclusion of size and book-to-market factors in the CAPM, a momentum factor in the three-factor model, and a liquidity factor in the four-factor model improve their explanatory power of portfolio returns. In addition, we found that the five-factor model is marginally superior to the other asset pricing models tested.

Who is King in Factor Zoo? Case of the Chinese Stock Market

2020 ◽  
Vol 14 (2) ◽  
pp. 77-102
Author(s):  
Simon M. S. So
Keyword(s):  
Asset Pricing ◽  
Stock Market ◽  
Stock Returns ◽  
Factor Model ◽  
Five Factor Model ◽  
Investment Strategy ◽  
Capital Asset Pricing ◽  
Chinese Stock Market ◽  
Fama And French ◽  
Three Factor

This paper aimed to evaluate and compare individual performances and contributions of seven well-known factors, selected from four widely cited asset pricing models: (1) the capital asset pricing model of Sharpe (1964), (2) the three-factor model of Fama and French (1993) the augmented four-factor model of Carhart (1997), (3) the five-factor model of Fama and French (2015), and (4) the illiquidity model of Amihud, et al. (2015) in capturing the time-series variation of stock returns and absorbing the 12 prominent anomalies. The anomalies were constructed by forming long-short portfolios, and regressions were run to examine their monthly returns from 2000 to 2019. We found that there is no definite and absolute “king” in the factor zoo in the Chinese stock market, and size is the relative “king” that can absorb the maximum number of anomalies. Evidence also indicates that the three-factor model of Fama and French may still play an important role in pricing assets in the Chinese stock market. The results can provide investors with a reliable risk factor and help investors form an effective investment strategy. This paper contributes to asset pricing literature in the Chinese market.G1

Evaluating alternative performance benchmarks for Indian mutual fund industry

2017 ◽  
Vol 14 (2) ◽  
pp. 222-250 ◽  
Author(s):  
Sanjay Sehgal ◽  
Sonal Babbar
Keyword(s):  
Asset Pricing ◽  
Mutual Fund ◽  
Factor Model ◽  
Five Factor Model ◽  
Content Type ◽  
Asset Pricing Model ◽  
Fund Managers ◽  
Asset Pricing Models ◽  
Performance Benchmarks ◽  
Fama And French

Purpose The purpose of this paper is to perform a relative assessment of performance benchmarks based on alternative asset pricing models to evaluate performance of mutual funds and suggest the best approach in Indian context. Design/methodology/approach Sample of 237 open-ended Indian equity (growth) schemes from April 2003 to March 2013 is used. Both unconditional and conditional versions of eight performance models are employed, namely, Jensen (1968) measure, three-moment asset pricing model, four-moment asset pricing model, Fama and French (1993) three-factor model, Carhart (1997) four-factor model, Elton et al. (1999) five-index model, Fama and French (2015) five-factor model and firm quality five-factor model. Findings Conditional version of Carhart (1997) model is found to be the most appropriate performance benchmark in the Indian context. Success of conditional models over unconditional models highlights that fund managers dynamically manage their portfolios. Practical implications A significant α generated over and above the return estimated using Carhart’s (1997) model reflects true stock-picking skills of fund managers and it is, therefore, worth paying an active management fee. Stock exchanges and credit rating agencies in India should construct indices incorporating size, value and momentum factors to be used for purpose of benchmarking. Originality/value The study adds new evidence as to applicability of established asset pricing models as performance benchmarks in emerging market India. It examines role of higher order moments in explaining mutual fund returns which is an under researched area.

Dynamic Factors and Asset Pricing

2010 ◽  
Vol 45 (3) ◽  
pp. 707-737 ◽  
Author(s):  
Zhongzhi (Lawrence) He ◽  
Sahn-Wook Huh ◽  
Bong-Soo Lee
Keyword(s):  
Asset Pricing ◽  
Factor Model ◽  
Dynamic Factor ◽  
Pricing Model ◽  
Portfolio Returns ◽  
Dynamic Factors ◽  
Ex Ante ◽  
Out Of Sample ◽  
Competing Models ◽  
Fama And French

AbstractThis study develops an econometric model that incorporates features of price dynamics across assets as well as through time. With the dynamic factors extracted via the Kalman filter, we formulate an asset pricing model, termed the dynamic factor pricing model (DFPM). We then conduct asset pricing tests in the in-sample and out-of-sample contexts. Our analyses show that the ex ante factors are a key component in asset pricing and forecasting. By using the ex ante factors, the DFPM improves upon the explanatory and predictive power of other competing models, including unconditional and conditional versions of the Fama and French (1993) 3-factor model. In particular, the DFPM can explain and better forecast the momentum portfolio returns, which are mostly missed by alternative models.

scholarly journals MULTIFACTOR ASSET PRICING ANALYSIS OF THE BALTIC STOCK MARKET

Ekonomika ◽  
2010 ◽  
Vol 89 (4) ◽  
pp. 85-95 ◽  
Author(s):  
Raimonds Lieksnis
Keyword(s):  
Asset Pricing ◽  
Stock Market ◽  
Factor Model ◽  
Stock Market Index ◽  
Cross Sectional ◽  
Economic Significance ◽  
Market Index ◽  
Fama And French ◽  
The Baltic ◽  
Three Factor

This study investigates whether the Fama–French three-factor asset pricing model is applicable for explaining cross-sectional returns of stocks listed in the Baltic stock exchanges. Findings confirm the validity and economic significance of the three-factor model for the Baltic stock market: only investors who chose to invest in value stocks during the reference period achieved positive returns by matching or beating the returns of the stock market index. The monthly returns of 8 Latvian, 13 Estonian and 27 Lithuanian company stocks are analyzed for the time period from June 2002 till February 2010 by the methodology presented in Davis, Fama, and French (2000). Cross-sectional multivariate regression is calculated with stock portfolios representing the book-to-market and capitalization of companies as independent variables along with the stock market index. The study concludes that these three factors in the three-factor model are statistically significant, but, in line with earlier studies, regression intercepts are significantly different from zero and the model is not statistically confirmed.p>

scholarly journals Long-run Accounting Conservatism and subsequent equity returns

2017 ◽  
Vol 9 (1) ◽  
pp. 60-75
Author(s):  
Wessel M. Badenhorst
Keyword(s):  
Equity Returns ◽  
Accounting Conservatism ◽  
Accrual Anomaly ◽  
Long Run ◽  
Fama And French ◽  
The Impact ◽  
Fama And French Model ◽  
Three Factor ◽  
French Model

This paper investigates the impact of long-run accounting conservatism on subsequent equity returns. The accounting conservatism proxy used is based on prior research and considered for different possible specifications. In contrast to prior research, this study compensates for the impact of momentum and the accrual anomaly by using five-year subsequent buy and hold total returns. A three-factor Fama and French model finds that accounting conservatism does not have a significant impact on subsequent equity returns for a sample of US firms. Stratifying the sample into pre-crisis and crisis periods does not affect results. However, this study also reveals that firms within certain industries do benefit from increased accounting conservatism, during both pre-crisis and crisis sample periods.

Information asymmetry and stock returns

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Anshi Goel ◽  
Vanita Tripathi ◽  
Megha Agarwal
Keyword(s):  
Asset Pricing ◽  
Information Asymmetry ◽  
Stock Returns ◽  
Content Type ◽  
Information Risk ◽  
Portfolio Returns ◽  
Expected Stock Returns ◽  
Fama And French ◽  
The Relationship ◽  
Three Factor

PurposeThis study endeavours to examine the relationship between information asymmetry and expected stock returns at the National Stock Exchange (NSE) of India, with a sample of NIFTY 500 stocks for a period ranging from 1st April 2000 to 31st March 2018, by employing three different proxies of information asymmetry: number of transactions, institutional ownership and idiosyncratic volatility.Design/methodology/approachThe return differential amongst information-sorted decile portfolios has been assessed to understand the effect of information risk on stock returns by employing (1) traditional measures of performance evaluation like mean, Sharpe,  Treynor and information ratios, (2) regression models like the capital asset pricing (CAPM), Fama and French three-factor, Carhart's four-factor, information-augmented CAPM, information-augmented Fama and French three-factor and information-augmented Carhart's four-factor models and (3) an autoregressive distributed lag (ARDL) model.FindingsThe empirical evidence indicated that as information asymmetry associated with portfolio increases, returns also expand to recompense investors for bearing information risk validating the existence of a significant positive relationship between information asymmetry and expected stock returns at the NSE. Amongst the various asset pricing models employed in this study, the information-augmented Fama and French three-factor model turned out to be the best in explaining cross-sectional variations in portfolio returns.Research limitations/implicationsStrong information premium was observed such that high information stocks outperformed low information stocks which have strong inference for investors and portfolio managers, who all continuously look out for investment strategies that can lend hand to beat the market.Originality/valueEasley and O'Hara (2004) proposed that stocks with more information asymmetry have higher expected returns. Very few studies have examined this relationship between information risk and stock returns that too restricted to the US market only, with a few on other emerging markets. No work has been conducted on the concerned issue in the Indian context. Therefore, it seems to be the first study to explore the relationship between information asymmetry and expected stock returns in the Indian securities market.

scholarly journals Empirical Test of Single Factor and Multi-Factor Asset Pricing Models: Evidence from Non Financial Firms on the Ghana Stock Exchange (GSE)

2015 ◽  
Vol 8 (1) ◽  
pp. 99
Author(s):  
Prince Acheampong ◽  
Sydney Kwesi Swanzy
Keyword(s):  
Asset Pricing ◽  
Factor Model ◽  
Stock Exchange ◽  
Explanatory Power ◽  
Pricing Model ◽  
Asset Pricing Model ◽  
Financial Firms ◽  
Portfolio Returns ◽  
Ghana Stock Exchange ◽  
Three Factor

<p>This paper examines the explanatory power of a uni-factor asset pricing model (CAPM) against a multi-factor model (The Fama-French three factor model) in explaining excess portfolio returns on non-financial firms on the Ghana Stock Exchange (GSE). Data covering the period January 2002 to December 2011 were used. A six Size- Book-to-Market (BTM) ratio portfolios were formed and used for the analysis. The paper revealed that, a uni-factor model like the (CAPM) could not predict satisfactorily, the excess portfolio returns on the Ghana Stock Exchange. By using the multi-factor asset pricing model, that is, the Fama-French Three Factor Model, excess portfolio returns were better explained. It is then conclusive enough that, the multi-factor asset pricing model introduced by Fama and French (1992) was a better asset pricing model to explain excess portfolio returns on the Ghana Stock Exchange than the Capital Assets Pricing Model (CAPM) and that there exist the firm size and BTM effects on the Ghanaian Stock market.</p>

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