Adapting and testing the Fama and French model, with some variations of company characteristics

ABSTRACT

We examine whether the Fama and French (1992) (F&F) model can be adapted to become a more versatile and flexible tool, capable of incorporating variations of company characteristics in a more dynamic form. For this, the risk factors are reconstructed at the end of each reading of monthly data. We argue that, over time, the evaluation of a company may change as a result of variations in its market price, size or book price, and we are aware that the F&F model does not accurately reflect these dynamics. Our results show that the adapted model is able to capture the behaviour of a greater number of stocks than the original F&F model and risk factors are more significant when building them through our procedure. In addition, we carry out these adaptations during a period of instability in financial markets.

KEYWORDS:

• Financial models
• Fama and French model
• risk factors

JEL CLASSIFICATION:

• G11
• G12

Acknowledgements

The authors wish to state that the financing of this research was supported by the Government of Aragón and by the EUROPEAN SOCIAL FUND under Grant G/17030/5423/440030/11101 (50%) and 17030/5423/440030/91101 (50%). We also wish to acknowledge the technical and operational support provided by GIECOFIN. It goes without saying that any errors are the sole responsibility of the authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Financial companies are excluded, for the same reasons as Fama and French (1992).

Additional information

Funding

This work was supported by the Government of Aragón [G/17030/5423/440030/11101 (50%)] and EUROPEAN SOCIAL FUND [17030/5423/440030/91101 (50%)].