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Non-nested tests of a GDP-augmented Fama–French model versus a conditional Fama–French model in the Australian stock market

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  • Faff, Robert
  • Gharghori, Philip
  • Nguyen, Annette

Abstract

We extend Vassalou (2003) by conditioning the Fama–French model with the same macroeconomic variables used to construct a GDP factor. The motivation for doing so is to ascertain whether the ability of the GDP-augmented model to explain equity returns is actually due to news about future GDP growth or whether it is due to the macroeconomic conditioning variables used to construct the GDP factor. We compare the performance of a GDP-enhanced Fama–French model with the conditional Fama–French model using non-nested testing techniques. We find that the GDP-augmented model considerably underperforms the conditional version of the model.

Suggested Citation

  • Faff, Robert & Gharghori, Philip & Nguyen, Annette, 2014. "Non-nested tests of a GDP-augmented Fama–French model versus a conditional Fama–French model in the Australian stock market," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 627-638.
    • Handle: RePEc:eee:reveco:v:29:y:2014:i:c:p:627-638
    DOI: 10.1016/j.iref.2013.07.007
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    2. Heaney, Richard & Koh, SzeKee & Lan, Yihui, 2016. "Australian firm characteristics and the cross-section variation in equity returns," Pacific-Basin Finance Journal, Elsevier, vol. 37(C), pages 104-115.
    3. Anshul Verma & Riccardo Junior Buonocore & Tiziana di Matteo, 2017. "A cluster driven log-volatility factor model: a deepening on the source of the volatility clustering," Papers 1712.02138, arXiv.org, revised May 2018.

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    More about this item

    Keywords

    GDP growth; Fama–French model; Asset pricing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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