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Research on the Applicability and Extensions of the Fama-French Three-Factor Model – Evidence from Tech Market ETF
- 1 Zhejiang University of Finance and Economics
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Abstract
In this paper, the Nasdaq 100 Index (ETF) is selected as a representative of the technology sector, and the dominant factors affecting the performance of stock returns in the technology market are explored through data processing and regressions of its monthly returns from 2014 to 2023.In this study, the Nasdaq 100 Index (ETF) is used as a proxy for the technology sector. The study investigates the dominant factors affecting the performance of the technology market stock returns. This study adds 10 extended factors to the Fama-French three-factor model,with the aim of finding the variables which strongly impact on NDX returns. Each factor was tested and screened through multiple time series regression, multiple covariance analysis, and stepwise regression. Finally, the Fama-French two-factor extended model with the largest R-squared value and the strongest explanatory power for NDX returns was constructed. Its independent variables include market returns and premiums, SMB, HML, interest rate changes, and industrial production index changes. Compared to the original Fama-French three-factor model (R-squared 0.871), the reconstructed Fama two-factor extended model has a better fitting which has an R-squared of 0.885, which illustrates the effect of the newly added factors on the technology market stock portfolio and provides an empirical evidence on that the new model is an improvement for the technology market stock portfolio.
Keywords
Fama-French model, Tech market, Multi-factor model, stepwise regression
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Cite this article
Cen,K. (2024). Research on the Applicability and Extensions of the Fama-French Three-Factor Model – Evidence from Tech Market ETF. Advances in Economics, Management and Political Sciences,124,10-16.
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