Constructing Fama–French Factors from Style Indices: Evidence from the Islamic Equity Market

ABSTRACT

This study has contributed to the analysis of the Fama–French three-factor model by proving the validity of model using the newly constructed Fama–French factors from Malaysian Islamic stock market. With generalized method of moments and robustness tests, our results compliment earlier studies by comparing the results over two sub-periods, before and after the financial crises and the fall of Lehman Bros. The results of the analysis suggest that the reversal of size effects exists after periods of financial crisis. This is the first attempt to create FF factors and test the model from Islamic equity style indices.

KEY WORDS:

• equity style index
• Fama–French three-factor model
• generalized method of moments
• Islamic equity market
• Islamic finance

Acknowledgments

The authors would like to thank Dr. Long Pham from the State Bank of Vietnam and Professor Ban Kanemi from Osaka University for their advice. In addition, the authors would like to express their appreciation for useful comments by participants in presentation at the 18th Malaysian Finance Association Annual Conference held in May 2016.

Funding

The authors would also like to record their appreciation for funding under FRGS Grant FP032-2010B from the Ministry of Education and University of Malaya.

Notes

^1. Refer to Faff (2004).

Additional information

Funding

The authors would also like to record their appreciation for funding under FRGS Grant FP032-2010B from the Ministry of Education and University of Malaya.