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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
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References in periodicals archive ?
Like the three factor model, the momentum variable is characterized as a self-financing arrangement of (long positive momentum) + (short negative momentum).
In the subsequent paper (Fama and French, 1993), confirmed similar results by considering stocks and bonds, which confirmed the reliability of the three factor model.
Similar to the one factor model, the fit statistics for the three factor model showed adequate fit.
Hence, suggests that three factor model consists of market premium should also be used size and BTM to predict future equity returns.
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.
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." Investment Management and Financial Innovations, 5(4), 39-49.
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: