Constructing and Testing Alternative Versions of the Fama-French and Carhart Models in the UK

Abstract

We would like to thank the Leverhulme Trust for supporting the project which gave rise to this investigation. We would also like to thank the Editor, Peter Pope, and an anonymous referee for their constructive and helpful comments on an earlier draft of the paper. 2 Constructing and Testing Alternative Versions of the Fama-French and Momentum Portfolios and Factors in the UK AbstractThe aim of this paper is to construct and test alternative versions of the Fama-French and Carhart models for the UK market. We conduct a comprehensive analysis of such models, forming risk factors using approaches advanced in the recent literature including value weighted factor components and various decompositions of the risk factors. We also test whether such factor models can at least explain the returns of large firms. Despite these various approaches, we join Michou, Mouselli and Stark (2007) and Fletcher (2010) in demonstrating that such factor models fail to reliably describe the cross-section of returns in the UK.

Pairs trading in the UK equity market: risk and return

“…The strong negative correlation between momentum and the value factors is particularly striking (Asness (1997) and Gregory et al (2013) highlight similar effects in the US and UK respectively). Asness, Moskowitz, and Pedersen (2013) suggest that liquidity risk may be an important common component of value and momentum, and, help explain why value and momentum are negatively correlated.…”

“…The five factor model is detailed below in equation (4). The market, size and value factors (Fama and French (1993)) and the momentum factor (Carhart (1997)) are created for UK data as discussed in Gregory, Tharyan, and Christidis (2013). 10 The reversal factor is constructed using the constituents of the FTSE All-Share Index following Gatev et al (2006).…”

Modelling oil and gas stock returns using multi factor asset pricing model including oil price exposure

“…Fama and French (1993) proposed a three factor asset pricing model designed to overcome some of the limitations observed in CAPM by introducing additional factors like firm size and book to market ratio along with the market risk. Since then, scholars have been confirming the power of the new model in the determination of stock returns than the original CAPM, (Lawrence et al (2007); Gregory et al (2013)). Carhart (1997) suggested the importance of a firm's recent performance in its ability to outperform in near future and introduced the fourth factor of momentum effect.…”

Improved Inference in the Evaluation of Mutual Fund Performance Using Panel Bootstrap Methods

“…,, Gregory, Tharyan and Christidis (2013). 20 Note that the estimated factor loadings for the models where the dependent variable is based on gross returns are very similar to those in the corresponding models where the dependent variable is based on net returns.…”