Are the Fama and French Factors Global or Country-Specific?
John M. Griffin
University of Texas at Austin - Department of Finance
The Review of Financial Studies, Forthcoming
This paper examines whether country-specific or global versions of Fama and French's three-factor model better explain time-series variation in international stock returns. Regressions for portfolios and individual stocks indicate that domestic factor models explain much more time-series variation in returns and generally have lower pricing errors than does the world factor model. In addition, decomposing the world factors into domestic and foreign components demonstrates that the addition of foreign factors to domestic models leads to less accurate in- and out-of-sample pricing. Practical applications of the three-factor model, such as cost-of-capital calculations and performance evaluation, are best performed on a country-specific basis.
Keywords: cost of capital, Fama and French model, asset pricing model
JEL Classification: G12, G15, F20Accepted Paper Series
Date posted: March 22, 2002
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