Application of Fama and French Three Factor Model and its Variants An Empirical study on Indian Stock Market

Abstract

Fama and French (1993) elaborated the use of fi rm spec ifi c characteristics in explaining the return behavior of different types of portfolios. He extended the CAPM model and described that only market factor cannot descri be the return behavior of th e stocks in a significant manner but a blend of market factor with the size and book to market ratio jointly have more power to exp lain the beh avi or of stock returns. It can be ascertained from the findings of the study that in Indian capital market, instead of considering the market ri sk and firm specifi c characteristics (SMB and HML) individually to expl ain the return behavior of the stock prices, a combination of all these three factors have more predictability power to express the stock return behavior.