The Fama-French
three-factor model is one of the most important models in asset pricing theory,
extending the CAPM by incorporating the size and book-to-market (BTM) effects.
Several studies have shown that the three-factor model has significantly
greater explanatory power over the CAPM.
The present study
contributes to the literature by proposing fixed-effects panel regression
analysis of stock performance on beta, log of total assets and the
book-to-market ratio, controlling for stock-specific and period-specific
effects as an alternative to the classic Fama-French methodology, which
involves the comparison of the rates of return of a portfolio consisting of
high BTM stocks with a portfolio consisting of low BTM stocks and the
comparison of the rates of return of a portfolio consisting of small firm
stocks with a portfolio consisting of large firm stocks. The study examines the
three-factor model using a sample of nine large-cap stocks from the banking
industry in the National Stock Exchange (NSE) of India, over the study period
01/04/2008 - 31/03/2016.
The results of the study indicate significant negative impact of the BTM
ratio on mean returns, and no significant beta and size effects. These results
are quite different from most of the previous studies in the literature, which
assert that stocks with high BTM ratio tend to have higher returns than stocks
with low BTM ratio; however, the results of the study do conform partially with
the literature of the three-factor model, in that it was generally found the
BTM factor to be dominant over the beta and size factors.
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