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Robustness of the Carhart four-factor and the Fama-French three-factor models on the South African stock market

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  • Nicholas Addai Boamah

Abstract

Purpose - – The purpose of this study is to explore the applicability of the Fama–French and Carhart models on the South African stock market (SASM). It examines the ability of the models to capture size, book-to-market (BM) and momentum effects on the SASM. The paper, additionally, explores the ability of the Fama–French–Carhart factors to predict the future growth of the South African economy. Design/methodology/approach - – The paper relies on data of 848 firms from January 1996 to April 2012 to examine the size, BM and momentum effects on the SASM. The paper constructs the test assets from a 3 × 3 sort on size and BM and a 3 × 3 sort on size and momentum. The paper estimates momentum as the past six-months’ cumulative return. The momentum portfolios are monthly rebalanced. Additionally, the size and BM portfolios are formed annually at the end of each June. Findings - – Evidence is provided that size, BM and momentum effects exist on the SASM; also, the small- and high-BM firm portfolios, respectively, appear riskier than the big- and low-BM firm portfolios. The paper provides evidence of past winners outperforming past losers aside from the small-firm group. Additionally, the models only partially capture the size and value effects on the SASM. The Carhart model partly captures the momentum effects, but the Fama–French model is unable to describe the returns to the momentum-sorted portfolios. The evidence shows that the models’ factors predict future gross domestic product growth. Originality/value - – The models do not fully describe returns on the SASM; any application of the models on the SASM should be done with caution. The Carhart model better describes returns than the Fama–French model on the SASM. The Fama–French–Carhart factors may relate to the underlying economic risk of the South African economy.

Suggested Citation

  • Nicholas Addai Boamah, 2015. "Robustness of the Carhart four-factor and the Fama-French three-factor models on the South African stock market," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 14(4), pages 413-430, November.
  • Handle: RePEc:eme:rafpps:v:14:y:2015:i:4:p:413-430
    DOI: 10.1108/RAF-01-2015-0009
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    Citations

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    Cited by:

    1. Chia-Cheng Chen & Chia-Li Tai & Yi-Chun Cho, 2019. "Market Illiquidity Premium on Stock Returns: An Empirical Study of Taiwan Stock Markets," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 9(7), pages 778-788, July.
    2. Steffen Hundt & Andreas Horsch, 2019. "Sponsorship of the FIFA world cup, shareholder wealth, and the impact of corruption," Applied Economics, Taylor & Francis Journals, vol. 51(23), pages 2468-2491, May.
    3. Fahad Ali & RongRong He & YueXiang Jiang, 2018. "Size, Value and Business Cycle Variables. The Three-Factor Model and Future Economic Growth: Evidence from an Emerging Market," Economies, MDPI, vol. 6(1), pages 1-24, February.
    4. Ailie Charteris & Mukashema Rwishema & Tafadzwa-Hidah Chidede, 2018. "Asset Pricing and Momentum: A South African Perspective," Journal of African Business, Taylor & Francis Journals, vol. 19(1), pages 62-85, January.
    5. Boamah, Nicholas Addai & Loudon, Geoffrey & Watts, Edward J., 2017. "Structural breaks in the relative importance of country and industry factors in African stock returns," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 79-88.
    6. Omar Tazi & Samir Aguenaou & Jawad Abrache, 2022. "A Comparative Study of the Fama-French Three Factor and the Carhart Four Factor Models: Empirical Evidence from Morocco," International Journal of Economics and Financial Issues, Econjournals, vol. 12(1), pages 58-66.
    7. Boamah, Nicholas Addai & Watts, Edward J. & Loudon, Geoffrey, 2017. "Financial crisis, the real sector and global effects on the African stock markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 88-96.
    8. Nicholas Addai Boamah, 2021. "Integration, investor protection rules and global informational inefficiency of emerging financial markets," SN Business & Economics, Springer, vol. 1(6), pages 1-22, June.
    9. Boamah, Nicholas Addai, 2022. "Segmentation, business environment and global informational efficiency of emerging financial markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 52-60.
    10. Boamah, Nicholas Addai & Akotey, Joseph Oscar & Aaawaar, Godfred, 2020. "Economic engagement and within emerging markets integration," Research in International Business and Finance, Elsevier, vol. 52(C).

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