Study of the Fama and French Three-factor model in the Brazilian stock market
DOI:
https://doi.org/10.22478/ufpb.2318-1001.2022v10n1.56417Abstract
Objective: To verify if the Fama and French three-factor model (FF3F) is able to price the return of shares in the Brazilian stock market and to analyze the model with only two factors to identify which of the factors are significant to explain the return of the shares.
Background: Fama and French (1993) proposed a pricing model with three factors (FF3F) and conducted research demonstrating that the FF3F model is more effective than the traditional CAPM model. Roger and Securato (2009) compared the CAMP models and the 3-Factors of Fama and French, in the Brazilian capital market and concluded that the expected returns of the stock can be achieved by a 2-Factor model.
Method: A comparative analysis of the returns made and estimated by the FF3F model of the shares of 20 Brazilian companies in the period from 2000 to 2018 was performed. By calculating the variations between the real and estimated returns, it is possible to identify whether the returns made were close calculated.
Results: Only a small percentage of the returns estimated by the FF3F model occurred according to the actual returns calculated in the analysis period and most of the estimated returns are much higher than the returns made. However, a two-factor model (market risk and size) manages to price the return on Brazilian market shares.
Contributions: The development of this work contributes to decision making in variable income, assisting investors in the choice and application of suitable mathematical models that can guide them as to the assets that should compose their investment portfolio.
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