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Analysis of Variability in Excess Portfolio Return Using Fama and French Three-Factor Model: Evidence from Nairobi Security Exchange in Kenya

In: Impacting Society Positively Through Technology in Accounting and Business Processes

Author

Listed:
  • Richard Wamalwa Wanzala

    (University of Johannesburg)

  • Lawrence Obokoh

    (University of Johannesburg)

Abstract

The goal of this study was to use the three-factor model developed by Fama and French to describe excess portfolio return variations. The dependent variables used in this study were the size risk factor, the value risk factor, and the market risk factor. Nine portfolios were created using stocks traded on the Nairobi Securities Exchange in Kenya between January 2001 and December 2022 to serve as independent variables and test the model. The empirical component of the study is based on the monthly excess return for each stock. This study’s statistical findings show that large- and medium-sized portfolios outperform small portfolios in terms of realized excess returns. Furthermore, when compared to the other two risk factors, the market risk factor has a more significant and broad impact on portfolio returns. The result of this study revealed that the three-factor model proposed by Fama and French has limited ability to explain variations in portfolio returns. The study’s findings are significant because they will assist policymakers in developing measures to encourage both domestic and foreign investors to invest in the NSE, thereby increasing trading volume, which is an important factor in excess return.

Suggested Citation

  • Richard Wamalwa Wanzala & Lawrence Obokoh, 2025. "Analysis of Variability in Excess Portfolio Return Using Fama and French Three-Factor Model: Evidence from Nairobi Security Exchange in Kenya," Springer Proceedings in Business and Economics, in: Tankiso Moloi (ed.), Impacting Society Positively Through Technology in Accounting and Business Processes, pages 761-777, Springer.
    • Handle: RePEc:spr:prbchp:978-3-031-84885-8_42
    DOI: 10.1007/978-3-031-84885-8_42
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