Adapting and testing the Fama and French model, with some variations of company characteristics

Luis Ferruz and Guillermo Badía

Applied Economics Letters, 2017, vol. 24, issue 5, 342-345

Abstract: We examine whether the Fama and French (1992) (F&F) model can be adapted to become a more versatile and flexible tool, capable of incorporating variations of company characteristics in a more dynamic form. For this, the risk factors are reconstructed at the end of each reading of monthly data. We argue that, over time, the evaluation of a company may change as a result of variations in its market price, size or book price, and we are aware that the F&F model does not accurately reflect these dynamics. Our results show that the adapted model is able to capture the behaviour of a greater number of stocks than the original F&F model and risk factors are more significant when building them through our procedure. In addition, we carry out these adaptations during a period of instability in financial markets.

Date: 2017
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DOI: 10.1080/13504851.2016.1192266

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