Fama and French Three Factor Model

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 ?
Fama and French three factor model: Evidence from Istanbul stock exchange.
Cross section of stock returns in India: Fama and french three factor model. International Conference on Management and Information Systems, (pp.
Specifically, the following models will be tested: i) a univariate model involving the leverage risk factor; ii) the Capital Asset Pricing Model; iii) the Fama and French Three Factor Model; iv) the Carhart (1997) four factor model; and v) a five factor model involving all risk factors:
A study of Fama and French Three Factor Model and Capital Asset Pricing Model in the Stock Exchange of Thailand.
Of course the [R.sup.2] for well diversified portfolios using the Fama and French three factor model is often on the order of .85 to .95.
The results suggest that the conditional Fama and French three factor model has performed better than the conditional CAPM when news asymmetry was taken into account compared with the unconditional Fama and French three factor model and the unconditional dual-beta CAPM in explaining the relationship in beta and returns in case of Pakistani market.
Keywords: Beta Instability, High Market Beta, Low Market Beta, EGARCH Model, News Asymmetry, Fama and French Three Factor Model
The beta dynamics is investigated by asymmetric response of beta to bullish and bearish market environment applying the dual beta CAPM and dual beta Fama and French three factor model on the 50 stocks traded in Karachi Stock Exchange during 1993-2007.