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The three-factor model without a linear return generating process

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  • Claude Bergeron

    (School of Business Administration, Teluq University)

Abstract

From a theoretical point of view, the Fama and French three-factor model requires the following implicit assumptions: (i) the excess return of an asset is correlated with market, size, and book-to-market factors, and (ii) the return generating process is linear. In this note, we demonstrate that the linearity assumption of the return generating process can be relaxed. This suggests that assumption (i) alone is sufficient for the three-factor model.

Suggested Citation

  • Claude Bergeron, 2021. "The three-factor model without a linear return generating process," Economics Bulletin, AccessEcon, vol. 41(3), pages 1763-1772.
    • Handle: RePEc:ebl:ecbull:eb-21-00211
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Asset pricing; Three-factor model; Linearity assumption;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G3 - Financial Economics - - Corporate Finance and Governance

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