Are the Fama-French Factors Proxying Default Risk?

Philip Gharghori, Howard Chan and Robert Faff
Additional contact information
Howard Chan: Department of Finance, University of Melbourne, VIC 3010.

Australian Journal of Management, 2007, vol. 32, issue 2, 223-249

Abstract: In this paper we investigate the contention that the Fama-French (1993) model's ability to explain cross-sectional variation in equity returns occurs because the Fama-French factors, SMB and HML, are proxying for default risk. To assess the default risk hypothesis, we augment the CAPM and the Fama-French model with a default factor and run system regressions of the default enhanced models using the GMM approach. Our key findings are that: 1) default risk is not priced in equity returns; and, 2) the Fama-French factors are not proxying for default risk. Although our findings suggest that SMB and HML are not proxying for default risk, our analysis indicates that the Fama-French factors are capturing some form of priced risk However, what type of risk the Fama-French factors are capturing remains an open question.

Keywords: FAMA-FRENCH MODEL; DEFAULT RISK; ASSET PRICING (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34)

Downloads: (external link)
https://journals.sagepub.com/doi/10.1177/031289620703200204 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:32:y:2007:i:2:p:223-249

DOI: 10.1177/031289620703200204

Access Statistics for this article

More articles in Australian Journal of Management from Australian School of Business
Bibliographic data for series maintained by SAGE Publications ().