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An Examination of the Fama and French Three-Factor Model Using Commercially Available Factors

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  • Robert Faff

    (School of Economics and Finance, Royal Melbourne Institute of Technology, GPO Box 2476V, Melbourne, VIC 3001.)

Abstract

In this paper we show that reasonable proxies for the FF factors can be readily constructed from ‘off the shelf’ style index data. We employ a GMM testing procedure in which the main focus of the tests is to assess the overriding validity of the restrictions placed on the empirical model framework. In addition, we augment the system of equations with a simple mean equation for each of the three FF risk factors, thereby permitting a direct estimate of the associated risk premia. The key findings are as follows. First, the proxy mimicking portfolios do represent pervasive sources of exposure across a sample of industry-sorted portfolios. Second, based on the outcome of all the GMM tests performed on our sample, the evidence seems to quite strongly support the three-factor Fama and French model. Third, when we take into account the estimated risk premia produced by our framework, the conclusion favouring the model has to be downweighted somewhat. Nevertheless, the estimated risk premia for the market and for the book-to-market factor are typically found to be significantly positive. Our main ‘perverse’ finding relates to the size risk premium which in our sample is typically significantly negative. This is consistent with other recent evidence of a ‘reversal’ in the size effect.

Suggested Citation

  • Robert Faff, 2001. "An Examination of the Fama and French Three-Factor Model Using Commercially Available Factors," Australian Journal of Management, Australian School of Business, vol. 26(1), pages 1-17, June.
  • Handle: RePEc:sae:ausman:v:26:y:2001:i:1:p:1-17
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    Cited by:

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    3. De Santis, Paola & Drago, Carlo, 2014. "Asimmetria del rischio sistematico dei titoli immobiliari americani: nuove evidenze econometriche
      [Systematic Risk Asymmetry of the American Real Estate Securities: Some New Econometric Evidence]
      ," MPRA Paper 59381, University Library of Munich, Germany.
    4. Michael A. O’Brien & Tim Brailsford & Clive Gaunt, 2010. "Interaction of size, book‐to‐market and momentum effects in Australia," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 50(1), pages 197-219, March.
    5. Robert J. Bianchi & Michael E. Drew & Timothy Whittaker, 2016. "The Predictive Performance of Asset Pricing Models: Evidence from the Australian Securities Exchange," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(04), pages 1-18, December.
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    7. Durand, Robert B. & Juricev, Alex & Smith, Gary W., 2007. "SMB -- Arousal, disproportionate reactions and the size-premium," Pacific-Basin Finance Journal, Elsevier, vol. 15(4), pages 315-328, September.
    8. Kathryn A. Holmes & Robert W. Faff, 2004. "Stability, Asymmetry and Seasonality of Fund Performance: An Analysis of Australian Multi-sector Managed Funds," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(3-4), pages 539-578.
    9. Anup K. Basu & Brigette Forbes & Henk Berkman, 2014. "Does fundamental indexation lead to better risk-adjusted returns? New evidence from Australian Securities Exchange," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 54(3), pages 699-728, September.
    10. Tommy Lundgren & Rickard Olsson, 2010. "Environmental incidents and firm value-international evidence using a multi-factor event study framework," Applied Financial Economics, Taylor & Francis Journals, vol. 20(16), pages 1293-1307.
    11. 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.
    12. Sunil Kumar Bundoo, 2008. "An augmented Fama and French three-factor model: new evidence from an emerging stock market," Applied Economics Letters, Taylor & Francis Journals, vol. 15(15), pages 1213-1218.
    13. Philip Gharghori & Ronald Lee & Madhu Veeraraghavan, 2009. "Anomalies and stock returns: Australian evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 49(3), pages 555-576, September.
    14. Hayette Gatfaoui, 2010. "Capital Asset Pricing Model," Post-Print hal-00589904, HAL.
    15. Chris Bilson & Angela Frino & Richard Heaney, 2005. "Australian retail fund performance persistence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 45(1), pages 25-42, March.
    16. Docherty, Paul & Chan, Howard & Easton, Steve, 2013. "Can we treat empirical regularities as state variables in the ICAPM? Evidence from Australia," Pacific-Basin Finance Journal, Elsevier, vol. 22(C), pages 107-124.
    17. Kai-Wei (Shaun) Siau & Stephen J. Sault & Geoffrey J. Warren & Henk Berkman, 2015. "Are imputation credits capitalised into stock prices?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 55(1), pages 241-277, March.
    18. Frédéric Blanc-Brude & Timothy Whittaker & Simon Wilde, 2017. "Searching for a listed infrastructure asset class using mean–variance spanning," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 31(2), pages 137-179, May.
    19. Paul Docherty & Howard Chan & Steve Easton, 2013. "Australian evidence on the implementation of the size and value premia," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 53(2), pages 367-391, June.
    20. Paul Docherty & Howard Chan & Steve Easton, 2010. "Tangibility and investment irreversibility in asset pricing," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 50(4), pages 809-827, December.
    21. Lien Duong & Izan H. Y. Izan, 2012. "Consequences of Riding Takeover Waves: A ustralian Evidence," International Review of Finance, International Review of Finance Ltd., vol. 12(4), pages 399-434, December.
    22. Adrian Melia & Paul Docherty & Steve Easton & Tom Smith, 2016. "Net share issues and the cross-section of equity returns under a dividend imputation tax system," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 56(4), pages 1097-1117, December.
    23. Mohan Subbiah & Frank J Fabozzi, 2016. "Equity style allocation: A nonparametric approach," Journal of Asset Management, Palgrave Macmillan, vol. 17(3), pages 141-164, May.

    More about this item

    Keywords

    ASSET PRICING; FAMA; FRENCH FACTORS; STYLE INDEXES;

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