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An augmented Fama and French three-factor model: new evidence from an emerging stock market

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  • Sunil Kumar Bundoo

Abstract

There were forty equity stocks listed on the stock exchange of Mauritius as at end of December 2004. Fama and French (1993) posit that a possible explanation for the size and book-to-market equity effects could be due to other risk factors not captured in a standard capital asset pricing model. This paper therefore investigates whether on the stock exchange of Mauritius, when taking into account the time variation in risk (as measured by time-varying betas), the two additional factors are still priced. The paper presents an augmented model, which takes into account the time variation in beta, in addition to the size and book-to-market equity factors. It is found that the coefficients for the size effect and the book-to-market equity effect are all significant at the one percent level and with the expected signs. These effects do not disappear. This shows that the Fama and French three factor model is robust to taking into account time-varying betas.

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  • Sunil Kumar Bundoo, 2008. "An augmented Fama and French three-factor model: new evidence from an emerging stock market," Applied Economics Letters, Taylor & Francis Journals, vol. 15(15), pages 1213-1218.
    • Handle: RePEc:taf:apeclt:v:15:y:2008:i:15:p:1213-1218
    DOI: 10.1080/13504850601018049
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    Cited by:

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    2. Asmâa ALAOUI TAIB & Safae BENFEDDOUL, 2023. "Explaining the time series of stock returns," Journal of Academic Finance, RED research unit, university of Gabes, Tunisia, vol. 14(2), pages 2-16, December.
    3. Mbengue, Mohamed Lamine & Ndiaye, Bara & Sy, Oumar, 2023. "Which factors explain African stock returns?," Finance Research Letters, Elsevier, vol. 54(C).
    4. Phan Tran Minh Hung & Tran Thi Trang Dai & Phan Nguyen Bao Quynh & Le Duc Toan & Vo Hoang Diem Trinh, 2019. "The Relationship between Risk and Return - An Empirical Evidence from Real Estate Stocks Listed in Vietnam," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 9(11), pages 1211-1226, November.
    5. 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.
    6. Asmâa Alaoui Taib & Safae Benfeddoul, 2023. "The Empirical Explanatory Power of CAPM and the Fama and French Three-Five Factor Models in the Moroccan Stock Exchange," IJFS, MDPI, vol. 11(1), pages 1-19, March.
    7. Mohan Subbiah & Frank J Fabozzi, 2016. "Equity style allocation: A nonparametric approach," Journal of Asset Management, Palgrave Macmillan, vol. 17(3), pages 141-164, May.

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