Fama and French (1993) Three-Factor Model: Evidence from Conventional and Shariah-Compliant Portfolios in Bursa Malaysia

Abstract

The main objective of this research is to test whether the style factors employed by the Fama and French (1993) three-factor model adequately explain the performance of four conventional sub-portfolios sorted by book value-to-market value (BVTMV) and their Shariah-compliant counterparts in Bursa Malaysia over the examination period from 1 December 2005 to 28 February 2018. To ensure the regression results of this research are unbiased estimations, tests for unit root, heteroskedasticity and autocorrelation bias were conducted on the regression variables. The regression test was conducted by regressing the monthly excess returns of the conventional and Shariah sub-portfolios on the monthly returns of the three factors of Fama and French (1993), which are the market risk premium, the small-cap risk premium, and the value risk premium. The results of this research revealed that the Fama and French (1993) three-factor model can significantly explain the performance of the four conventional sub-portfolios sorted by BVTMV and the four Shariah-compliant sub-portfolios sorted by BVTMV in Bursa Malaysia.

Is the Performance of Conventional and Shariah-Compliant Portfolios Two Sides of the Same Coin? Evidence from Bursa Malaysia

“…With regards to choosing the risk-free proxy, this research uses the 3-month Bank Negara Treasury -the central bank of Malaysia-bills rate as the risk-free proxy for the CP. The use of 3-month T-bills is consistent with numerous studies on the performance of funds and portfolios, such as Ong, Teh, Soh, and Yan (2012) and Rohuma (2022).…”

Value Stocks versus Growth Stocks: An Examination of Bursa Malaysia

“…Financial advisors frequently evaluate the risk-return characteristics of various equity styles since Morningstar decided to categorise domestic equity mutual funds into one of the nine style categories. Fama and French (1993) emphasised that size and value anomalies are considered possible risks in portfolios, and investors should compensate for investing in size and value stocks (Rohuma, 2022). Investors may be familiar with historical data showing that smallcap portfolios typically have higher long-term average returns but also more volatility than large-cap portfolios (Banz, 1981;Guo et al 2017;Maulina and Nuzula, 2018;Arnaya and Purbawangsa, 2020).…”