Testing Fama and French three-factor model for Hong Kong stocks : an empirical analysis

Abstract

This study tests the performance of the Fama-French three-factor model (1993) in explaining the stock portfolio returns in the Hong Stock market during the period from 1982 to 2001. Results show that firm size has an important effect on stock portfolio returns during the testing period. The book-to-market equity ratio also has an effect on stock portfolio returns, but it is weak compared to the size effect. The three-factor model also had a better performance in explaining the stock portfolio returns than the Capital Asset Pricing Model (1964). Finally, this study concludes that the three-factor model could be used to explain the January effect in the Hong Kong stock market.