Fama and French Three Factor Model

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Fama and French Three Factor Model

Created by Eugene Fama and Kenneth French to describe the expected return of a portfolio. Their model includes the market exposure (known as beta in the Capital Asset Pricing Model) plus two other risk factors: SMB (Small Minus Big) and HML (High Minus Low.) SMB accounts for the tendency for stocks of firms with small market capitalizations generate higher returns, while HML accounts for the tendency that value stocks (of firms with high Book to Market ratios) generating higher returns.

Fama and French Three Factor Model

An expansion of the capital asset pricing model that considers the facts that small cap stocks outperform large cap stocks and that value stocks do the same with respect to growth stocks. The model accounts for these facts when determining the appropriate price for these stocks.
References in periodicals archive ?
This three factor model has an empirical base: the broad variability of the ways of aging synthetically conceptualized by Rowe and Khan (1997) as "pathological" "normal", and "successfully" aging.
This reconciliation is generally established through asset pricing models, like Capital Asset Pricing Model (CAPM) of Sharpe (1964), Linter (1965) and Mossin (1966), Three Factor Model (FF3) of Fama and French (1993) and Four Factor Model (FF4) of (Carhart, 1997).
A three factor model was developed for predictive validity of admission criteria for achievement in medicine.
The results supported the three factor model of emotional labour in Pakistani settings.
Wu, 2008, "Persistence of Size and Value Premia and the Robustness of the Fama--French Three Factor Model in the Hong Kong Stock Market.
The results from this test indicate the existence of significant differences before and after the crisis, both in the relationship between the factors and in the values and significance of the coefficients of the CAPM and of the three factor model from Fama and French and the four factor model from Carhart, which justifies the division of the sample into the sub-periods.
The second model is the Fama-French three factor model (Fama & French, 1993):
2013) found that a three factor model, allowing correlated error terms, provided the best fit to the data.
They then add these two factors to CAPM to reflect a portfolio's exposure--that is, the Fama-French three factor model, which corresponds to the following 3-factor regression:
4% annually) using the CAPM and the Fama-French three factor model as the benchmarks, respectively.
Cross section of stock returns in India: Fama and french three factor model.
The failure of three factor model is also reported as book to market has a significant negative effect on return.