Extracting Fama-French Factors in India, Premature?

30 Pages Posted: 22 Nov 2017 Last revised: 2 Jan 2018

See all articles by Jim Kyung-Soo Liew

Jim Kyung-Soo Liew

Johns Hopkins University - Carey Business School

Ravpritpal (Ravi) Kohli

Johns Hopkins University - Carey Business School

Date Written: November 19, 2017

Abstract

Emerging market Fama-French factor research has been limited at best. In this work, we investigate emerging market Fama-French factors by studying current issues with the construction and deployment of these factors birthed from the Indian Stock Market. We establish a completely transparent process for and discussion regarding implementing the factors. We examine constituents of the Nifty 500 Index of the National Stock Exchange because of its high liquidity and representativeness. As of March 31, 2017, Nifty 500 Index represented 95.2% of the total market capitalization of the entire Exchange. We estimate the annual returns generated by the three Fama-French Factors as well as by the Carhart’s 4th Factor to range from 5% to 12%. We document two implementation constraints 1) short selling, given the limitation of short availability, and 2) liquidity risk, arising from the wide bid/ask spread of 20-25 basis points thus adding to higher transaction costs and possible market impact. Due to the prior two reasons, we argue that implementation of long-only portfolios is more prudent at this time. We estimate annual survivorship biases associated with these long-only portfolios range from 5%-6%, however, low B/M, small cap, and winners have extremely strong historical performance. We conclude that Fama-French factors, long-short portfolios, may be premature in India at this time but long-only portfolios could be an interesting addition to long-term investors.

Keywords: Fama-French, Smart Beta, Capital Markets, Indian Equities, NSE, Emerging Markets, BSE, Bid/Ask Spread, Nifty 500

JEL Classification: G1, G12, G14

Suggested Citation

Liew, Jim Kyung-Soo and Kohli, Ravpritpal (Ravi), Extracting Fama-French Factors in India, Premature? (November 19, 2017). Available at SSRN: https://ssrn.com/abstract=3074046 or http://dx.doi.org/10.2139/ssrn.3074046

Jim Kyung-Soo Liew (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Ravpritpal (Ravi) Kohli

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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