A New Look at the Fama-French Model: Evidence Based on Expected Returns

42 Pages Posted: 11 Jun 2012 Last revised: 28 Mar 2014

See all articles by Matthias X. Hanauer

Matthias X. Hanauer

Robeco Asset Management - Quantitative Strategies; Technische Universität München (TUM)

Christoph Jäckel

Technische Universität München (TUM)

Christoph Kaserer

Technische Universität München (TUM)

Date Written: March 27, 2014

Abstract

We test the Fama-French three-factor model for a large international data set using an alternative proxy for expected returns - the implied cost of capital (ICC). The implied risk premiums of the three factors are all highly significant. Also, the cross-country variation of each of the three factor risk premiums is much smaller compared to their counterparts based on realized returns. For all countries, we find the cross-sectional variation in expected stock returns not only to depend on the stock’s market risk but also to be driven by its exposure toward the implied size and value factors. Moreover, even though portfolio intercepts for the three-factor model display significant alphas, they are very small from an economic perspective. We conclude that the Fama-French three-factor model is an appropriate asset pricing model using this alternative proxy for expected returns.

Keywords: Expected returns, implied cost of capital, asset pricing, Fama-French three-factor model

JEL Classification: G12, G14, G15

Suggested Citation

Hanauer, Matthias Xaver and Jäckel, Christoph and Kaserer, Christoph, A New Look at the Fama-French Model: Evidence Based on Expected Returns (March 27, 2014). Available at SSRN: https://ssrn.com/abstract=2082108 or http://dx.doi.org/10.2139/ssrn.2082108

Matthias Xaver Hanauer (Contact Author)

Robeco Asset Management - Quantitative Strategies ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

HOME PAGE: http://www.robeco.com/en/insights/authors/matthias-hanauer.html

Technische Universität München (TUM) ( email )

Arcisstr. 21
Munich, D-80290
Germany

HOME PAGE: http://www.fm.wi.tum.de/?id=31

Christoph Jäckel

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, 80333
Germany
+49 (0)89 289 25487 (Phone)

HOME PAGE: http://www.fm.wi.tum.de/en/team/researcher/91-christoph-jaeckel

Christoph Kaserer

Technische Universität München (TUM) ( email )

Arcisstr. 21
Munich, D-80290
Germany
+49 89 289 25489 (Phone)
+49 89 289 25488 (Fax)

HOME PAGE: http://www.cefs.de

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