An Analysis of the Fama-French Three-Factor Model’s Capacity to Account for Cross-sectional Volatility in Stock Returns

Entong Xiao

doi:10.54254/2754-1169/42/20232069

Research Article

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Published on 10 November 2023

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Xiao,E. (2023). An Analysis of the Fama-French Three-Factor Model’s Capacity to Account for Cross-sectional Volatility in Stock Returns. Advances in Economics, Management and Political Sciences,42,1-6.

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An Analysis of the Fama-French Three-Factor Model’s Capacity to Account for Cross-sectional Volatility in Stock Returns

Entong Xiao *^,1,

¹ Kings College London

* Author to whom correspondence should be addressed.

https://doi.org/10.54254/2754-1169/42/20232069

Abstract

The study’s main focus is on the Fama-French Three-Factor Model’s capacity to account for cross-sectional volatility in stock returns. The Fama-French Three-Factor Model was used to assess a sample of 720 equity funds and determine each fund’s excess returns and three-factor risk exposures. The exposure of each element was then tested using linear regression to see if it could predict the excess returns. The study’s focus is on the shortcomings of the traditional Capital Asset Pricing Model (CAPM) and the possibility that the 3-factor model could offer a more precise and thorough explanation of stock returns. The empirical results indicate that it may not be robust all the time, and there could be other factors functioning meanwhile, which are not captured by the model. Furthermore, the Efficient Market Hypothesis (EMH) may not be effective and accurate in its strictest form. The study’s empirical examination of the Three-Factor Model and its implications for the Efficient Market Hypothesis (EMH) and other related ideas are what give it its value.

Keywords

The Fama-French Three-Factor Model, EMH, size factor (SMB), value factor (HML)

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References

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The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.

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About volume

Volume title: Proceedings of the 7th International Conference on Economic Management and Green Development

Conference website: https://www.icemgd.org/

ISBN：978-1-83558-105-6(Print) / 978-1-83558-106-3(Online)

Conference date: 6 August 2023

Editor：Canh Thien Dang

Series: Advances in Economics, Management and Political Sciences

Volume number: Vol.42

ISSN：2754-1169(Print) / 2754-1177(Online)

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