Comparison of the CAPM, the Fama-French Three Factor Model and Modifications by Christoph Lohrmann

Comparison of the CAPM, the Fama-French Three Factor Model and Modifications

byChristoph Lohrmann

Kobo ebook | August 18, 2015

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Seminar paper from the year 2014 in the subject Economics - Finance, grade: 6,0 (Schweizer Notensystem), University of Liechtenstein, früher Hochschule Liechtenstein, language: English, abstract: This paper is focused on comparing the Capital Asset Pricing Model, the Fama-French Three Factor model and two modified versions of the Fama-French Model in their ability to explain excess returns. The first modified model contains the same explanatory variables as the Fama-French Model but with an additional AR(1) process. The second modification contains instead of an additional AR(1) an AR(2) process. Evaluated by the adjusted R² and the Akaike information criterion, the Fama-French model yields a higher model-fit than the CAPM. The modified Fama-French Model with an AR(2) process leads to significant results for the twice lagged return in the model in four out of six tested portfolios. Therefore, the in-sample regression reveals a higher model-fit of the modified Fama-French model with AR(2) in comparison to the other three models. Since the results differ from a regression in the subsequent period, the results are most likely spurious. Nevertheless, the authors show the high-er model-fit of the Fama-French Three Factor Model in relation to the CAPM.

Title:Comparison of the CAPM, the Fama-French Three Factor Model and ModificationsFormat:Kobo ebookPublished:August 18, 2015Publisher:GRIN PublishingLanguage:English

The following ISBNs are associated with this title:

ISBN - 10:3668032238

ISBN - 13:9783668032231