Universal Journal of Accounting and Finance Vol. 12(3), pp. 49 - 59
DOI: 10.13189/ujaf.2024.120301
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Can Factor-Based Investing Thrive in Indian Stock Market? A Closer Look at Re-assessment over the Performance of Fama-French Three-factor Model

Khadeeja Farhana C P M ^*, Abdul Azees P
Research Department of Commerce and Management Studies, Farook College (Autonomous), Kozhikode, University of Calicut, Kerala, India

ABSTRACT

This study reassesses the application of Fama-French three-factor model in order to determine its performance in current scenario and to take a decision regarding the further development of the model. Fama-French three-factor model adds size and value to CAPM. Through performance evaluation, this study assesses the ability of the model to explain the cross-sectional variation in stock returns by considering the impact of size and value identified by Fama-French that are relevant in the Indian context. The Fama and French methods are used to build portfolios. The OLS is applied for running regression analysis. Generalized Method of Moments (GMM) regression, GRS model's performance tests are undertaken through Gretl, EViews and SPPS software of data ranging from April 2000 to March 2023. This study finds that Fama-French three-factor model is better capable of capturing stock returns in Indian stock market based on GRS statistics and the explanatory power of size factor is higher than value factor. BL portfolio (portfolio with big size and low BE/ME ratio) has low AIC indicating higher goodness of fit. The findings will assist investors, including institutional investors, asset managers, and individual investors, in making better investment decisions, asset allocation methods, and methods for managing risk. In conclusion, this three-factor model is still performing better in Indian stock market from 2000 to 2023 and the upgradation to this model gives even more explanatory power in risk factors other than this three-factor.

KEYWORDS
Fama-French Three-factor Model, Indian Stock Market, Size, Value

Cite This Paper in IEEE or APA Citation Styles
(a). IEEE Format:
[1] Khadeeja Farhana C P M , Abdul Azees P , "Can Factor-Based Investing Thrive in Indian Stock Market? A Closer Look at Re-assessment over the Performance of Fama-French Three-factor Model," Universal Journal of Accounting and Finance, Vol. 12, No. 3, pp. 49 - 59, 2024. DOI: 10.13189/ujaf.2024.120301.

(b). APA Format:
Khadeeja Farhana C P M , Abdul Azees P (2024). Can Factor-Based Investing Thrive in Indian Stock Market? A Closer Look at Re-assessment over the Performance of Fama-French Three-factor Model. Universal Journal of Accounting and Finance, 12(3), 49 - 59. DOI: 10.13189/ujaf.2024.120301.