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Revisiting Fama French Three-Factor Model in Indian Stock Market

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  • Yash Pal Taneja

Abstract

Stock market anomalies have always attracted questions over the applicability of Capital Asset Pricing Model (CAPM) for being an efficient predictor of stock market returns. Roll (1977), Banz (1981), Bhandari (1988), Jagadeesh (1992), Lakonishok, Shleifer, and Vishney (1994), Arumugam (1996) showed market anomalies for CAPM. Fama French (1992, 1996, and 2004) demonstrated the inability of CAPMs beta to explain the cross-sectional stock market returns by introducing two other factors i.e. size and value. In this study, the Capital Asset Pricing Model and Fama French Model have been examined by taking a sample of 187 companies for a study period of five years, ranging from June 2004 to June 2009. In order to validate the results, the sample selection was made on the basis of continuous presence in S&P CNX 500 index for at least ten years without fail. The study showed that efficiency of Fama French Model, for being a good predictor, can not be ignored in India but either of the two factors (size and value) might improve the model. It is so because a high degree of correlation is found between the size and value factor returns.

Suggested Citation

  • Yash Pal Taneja, 2010. "Revisiting Fama French Three-Factor Model in Indian Stock Market," Vision, , vol. 14(4), pages 267-274, October.
    • Handle: RePEc:sae:vision:v:14:y:2010:i:4:p:267-274
    DOI: 10.1177/097226291001400403
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    References listed on IDEAS

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    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W, 1994. "Contrarian Investment, Extrapolation, and Risk," Journal of Finance, American Finance Association, vol. 49(5), pages 1541-1578, December.
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    4. Roll, Richard, 1977. "A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory," Journal of Financial Economics, Elsevier, vol. 4(2), pages 129-176, March.
    5. Bhandari, Laxmi Chand, 1988. " Debt/Equity Ratio and Expected Common Stock Returns: Empirical Evidence," Journal of Finance, American Finance Association, vol. 43(2), pages 507-528, June.
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    7. Fama, Eugene F & French, Kenneth R, 1995. "Size and Book-to-Market Factors in Earnings and Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 131-155, March.
    8. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    9. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
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    Cited by:

    1. Dipesh Karki & Binam Ghimire, 2016. "Explaining Stock Returns in Nepal: Application of Single and Multi-factor models," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 5(3), pages 1-3.

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