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Tests of the Fama and French Three Factor Model in Iran

Majid Rahmani Firozjaee and Zeinab Salmani Jelodar
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Majid Rahmani Firozjaee: Mathematical Science Dep., Isfahan University of Technology, Isfahan, Iran
Zeinab Salmani Jelodar: Economic Dep., Isfahan University, Isfahan, Iran

Iranian Economic Review (IER), 2010, vol. 15, issue 3, 117-132

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.

Keywords: Purchasing power parity; panel unit root test; Lagrange multiplier; Structural break (search for similar items in EconPapers)
Date: 2010
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Handle: RePEc:eut:journl:v:15:y:2010:i:3:p:117