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Tests of the Fama and French Three Factor Model in Iran

Author

Listed:
  • Majid Rahmani Firozjaee

    (Mathematical Science Dep., Isfahan University of Technology, Isfahan, Iran)

  • Zeinab Salmani Jelodar

    (Economic Dep., Isfahan University, Isfahan, Iran)

Abstract

Fama and French (1992) found that beta has little or no ability in explaining cross-sectional variation in stock returns, but those variables such as size and the book-to-market ratio do. Since the time of the original publication of the Fama and French findings, Controversy and intense debate has emerged in the academic literature over the empirical performance of beta and the CAPM. This paper compare CAPM versus Fama and French three factors model and investigates the explanatory power of market beta, firm size, and book-to-market ratio, regarding the cross-sectional expected stock returns in Tehran stock exchange. The results indicate that Fama and French three factor model has strong explanatory power than CAPM and the explanatory power of market beta is significantly improved and successfully captures the cross-sectional variation in expected stock returns for the full sample period.

Suggested Citation

  • Majid Rahmani Firozjaee & Zeinab Salmani Jelodar, 2010. "Tests of the Fama and French Three Factor Model in Iran," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 15(3), pages 117-132, fall.
    • Handle: RePEc:eut:journl:v:15:y:2010:i:3:p:117
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    References listed on IDEAS

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    1. Kent Daniel & Sheridan Titman & K.C. John Wei, 2001. "Explaining the Cross‐Section of Stock Returns in Japan: Factors or Characteristics?," Journal of Finance, American Finance Association, vol. 56(2), pages 743-766, April.
    2. Fama, Eugene F & French, Kenneth R, 1995. "Size and Book-to-Market Factors in Earnings and Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 131-155, March.
    3. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    4. Basu, S, 1999. "Discussion of international differences in the timeliness, conservatism, and classification of earnings," Journal of Accounting Research, Wiley Blackwell, vol. 37, pages 89-99.
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    Cited by:

    1. Sana Tauseef, 2017. "Cross-Sectional Variation in Stock Returns: Evidence from an Emerging Market," Proceedings of Economics and Finance Conferences 4807087, International Institute of Social and Economic Sciences.

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