The capital asset pricing model and the three factor model of Fama and French revisited in the case of France
Lajili, Souad (2002), The capital asset pricing model and the three factor model of Fama and French revisited in the case of France. https://basepub.dauphine.fr/handle/123456789/9237
TypeDocument de travail / Working paper
Series titleCahier de recherche CEREG (DRM)
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Abstract (EN)Size and book to market ratio are both highly correlated with the average returns of common stocks. Fama and French (1993) argue that these eﬀects are proxies for factors of risk. In this study, we try to test the three factor model of Fama and French and the Capital Asset Pricing Model on the French Stock Market. We use returns on the six Fama and French portfolios sorted by size and book to market ratio. The sample is taken from July 1976 to June 2001. Our results show that the three factor model explains better the common variation in stock returns than the capital asset pricing model. Moreover, both the CAPM and the three factor model do a good job in explaining the cross section of stock returns. We test the three factor model with a set of market portfolios and we show that all market portfolios capture the common variation in stock returns. However, only the value-weight market portfolio can explain the cross-section in the stock returns. Finally, we test the January eﬀet in the French case and we show that there is no January eﬀect for both the dependent variable (stock portfolios) and the explanatory variables(the market, HML and SMB)
Subjects / KeywordsBook to market ratio; Size effect; Asset Pricing; Fama and French Unconditional Model and Anomalies; Risk factors
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