On the Validity of the Augmented Fama-French Four-Factor Model

The four-factor model and stock returns: evidence from Sri Lanka

“…These findings are consistent with the findings of Lam et al (2009) with respect to their study on the Hong Kong Stock Exchange; they conclude that the evidence of significant coefficients on the four factors and the insignificant intercepts provide strong support to the applicability of the four-factor model in the Hong Kong Stock Exchange. The regressions use the four-factor model to explain the excess returns on portfolios formed on independent size and B/M sorts.…”

“…In terms of its explanatory power, the four-factor model performs better than the Fama and French (1993) three-factor model in developed markets; however, in terms of the GRS F-test the results are not consistent in rendering regressions where the true intercepts are jointly zero (Bello, 2008;Brighi et al, 2010;Fama and French, 2012;Humphrey and O'Brien, 2010). Conversely when the GRS F-test is applied to emerging and developing markets the four-factor model is found to be more successful (Nartea et al, 2009;Lam et al, 2009;Lai and Lau, 2010;Cakici et al, 2013;Unlu, 2013;Hasnaoui and Ibrahim, 2013;Vo, 2015;Balakrishnan, 2015). However, there seems to be a dearth in the published evidence that test these models in frontier markets.…”