Application of Fama and French Three Factor Model and Stock Return Behavior in Indian Capital Market

Abstract

The present study is designed to empirically test the three factor model suggested by Fama and French on Indian stock market and to document the evidences as to how firm characteristics are used as a better way to explain the stock return behavior. Fama-French (1993) used value factors to elaborate the explanatory power of CAPM. The present study has considered companies listed under the BSE 500 index series for the empirical tests. The overall findings indicated that the three factor model given by Fama and French is more powerful, than its other variants of taking one or two factors in explaining the variability in the returns of all six portfolios.

Expectations and Stock Market in Nepal

“…The Fama-French three-factor model possesses better explanatory power of risk and return relationship and overcomes the CAPM's significant theoretical shortcoming. For example, Mehta and Chander (2010) observed reasonably consistent findings with the Fama-French three-factor model. Likewise, Gaunt (2004) observed a significant improvement in the explanatory power of the Fama-French three-factor model over the CAPM.…”

Four Factor Model in Indian Equities Market

“…Several authors including Connor and Sehgal (2001), Bahl (2006), Taneja (2010), Mehta and Chander (2010) and Tripathi (2008) have used or tested the Fama-French model or its variants in the Indian markets with a relatively small number of firms over relatively short periods of time. However, the study that comes closest to ours is Eun et al (2010), who estimated the monthly size, value and momentum factors in India, for the period between July 1993 and December 2010.…”