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The Extended Fama-French Three Factor Model : Revisited

Indonesian Capital Market Review

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Title The Extended Fama-French Three Factor Model : Revisited
 
Creator Intan Nurul Awwaliyah; Graduate School of Management, the University of Indonesia
Zaafri Ananto Husodo; Graduate School of Management, the University of Indonesia
 
Subject factor model, four-factor model, three-factor model, asset pricing, stock return
 
Description This paper is aimed to validate the four-factor asset pricing model as an improvement towards the standard Fama-French three-factor model. Using U.S. monthly stock returns data from period January 1963 to December 2010, we construct 25 portfolios and the four-factor model includes the market factor (beta), the size factor (SMB), the book-to-market factor (HML), and the ‘momentum' factor (MOM). Similar time series method as in Fama and French (1993) are employed to elaborate the three-factor model and the four-factor model regression. Our findings show that the four-factor model to some extent has significant capability in explaining the variations in average excess stock returns. Although the R2 extracted from the four-factor model is just slightly higher than the three-factor model, yet it provides suggestive for the robustness of the four-factor model. In addition, our robustness test shows that January seasonal effect is absorbed by the risk factors including the market factors, SMB, HML, and MOM factor. The consistency of the four-factor model in explaining the U.S stock market return variations for the newest data, provide relevance to apply this model in emerging markets data in order to give guidance for investor in understanding the market condition.
 
Publisher Management Research Center, Department of Management, Faculty of Economics and Business, U
 
Contributor —
 
Date 2019-04-04
 
Type —
 
Format application/pdf
 
Identifier http://journal.ui.ac.id/index.php/icmr/article/view/11181
 
Source Indonesian Capital Market Review; Vol 10, No 2 (2018): July 2018
 
Language en