Journal of Commerce and Accounting Research

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Testing of Three Factor Fama-French Model for Indian and US Stock Market


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1 Shri Ram College of Commerce, University of Delhi, Delhi, India
     

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The asset pricing modeling has attracted the attention of researchers and practitioners alike. The studies on asset pricing in initial years responded positively to the CAPM (Fama & Macbeth, 1973). However later studies by Stattman (1980), Banz (1981), Basu (1983), Bhandari (1988), and various other researchers found some anomalies such as size effect, leverage, value effect etc. which were not explained by CAPM. The Fama-French model (1993) is believed to capture these anomalies. We conduct the test of CAPM and three factor Fama-French model along with its variants for Indian and US capital markets. The results of our test find that though CAPM is able to capture the cross section of average returns both in India and US, still the three factor model with size and value factor can do the job better and hence is useful in pricing the financial assets of both developed and developing countries.

Keywords

CAPM, Fama-French Model, Asset Pricing.
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  • Testing of Three Factor Fama-French Model for Indian and US Stock Market

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Authors

Pankaj Chaudhary
Shri Ram College of Commerce, University of Delhi, Delhi, India

Abstract


The asset pricing modeling has attracted the attention of researchers and practitioners alike. The studies on asset pricing in initial years responded positively to the CAPM (Fama & Macbeth, 1973). However later studies by Stattman (1980), Banz (1981), Basu (1983), Bhandari (1988), and various other researchers found some anomalies such as size effect, leverage, value effect etc. which were not explained by CAPM. The Fama-French model (1993) is believed to capture these anomalies. We conduct the test of CAPM and three factor Fama-French model along with its variants for Indian and US capital markets. The results of our test find that though CAPM is able to capture the cross section of average returns both in India and US, still the three factor model with size and value factor can do the job better and hence is useful in pricing the financial assets of both developed and developing countries.

Keywords


CAPM, Fama-French Model, Asset Pricing.

References