The CAPM vs. The Fama and French Three-Factor Pricing Model: A Comparison Using Value Line Investment Survey
33 Pages Posted: 16 May 1998
Date Written: March 24, 1998
Abstract
The CAPM and Fama and French (FF) three-factor pricing model are subjected to a series of tests using out of sample data, free from many of the biases present in typical testing. Data is collected from the Value Line Investment Survey allowing for survivorship and look-ahead biases to be eliminated. Further, it is argued that simple portfolio selection rules and the use of data from a source commonly consulted by investors minimizes data snooping concerns. Stronger support is found for the CAPM than that reported by FF (1992, 1996). Size and book-to-market equity (B/M) are insignificant in cross-sectional regressions, and Gibbons, Ross, and Shanken (1989) F-tests cannot reject the appropriateness of the CAPM when stocks are sorted into size and B/M portfolios. Beta, on the other hand, emerges as a powerful anomaly. Neither the CAPM nor the FF model can explain the high (low) returns on low (high) beta portfolios.
JEL Classification: G12
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Can Investors Profit from the Prophets? Consensus Analyst Recommendations and Stock Returns
By Brad M. Barber, Reuven Lehavy, ...
-
Security Analysts' Career Concerns and Herding of Earnings Forecasts
By Jeffrey D. Kubik, Amit Solomon, ...
-
By Patricia Dechow, Amy P. Hutton, ...
-
Analyzing the Analysts: When Do Recommendations Add Value?
By Narasimhan Jegadeesh, Joonghyuk Kim, ...
-
An Empirical Analysis of Analysts' Target Prices: Short Term Informativeness and Long Term Dynamics
By Alon Brav and Reuven Lehavy
-
How Do Analysts Use Their Earnings Forecasts in Generating Stock Recommendations?