Application of Fama and French Three Factor Model and Stock Return Behavior in Indian Capital Market

Kiran Mehta1 and Ramesh Chander2

1RIMT-IMCT, M. Gobindgarh - 147301, Punjab, India
2University School of Management, Kurukshetra University, Kurukshetra – 136119, Haryana, India
1E-mail: ujjawalakiran@rediffmail.com

Abstract

The present study is designed to empirically test the three factor model suggested by Fama and French on Indian stock market and to document the evidences as to how firm characteristics are used as a better way to explain the stock return behavior. Fama-French (1993) used value factors to elaborate the explanatory power of CAPM. The present study has considered companies listed under the BSE 500 index series for the empirical tests. The overall findings indicated that the three factor model given by Fama and French is more powerful, than its other variants of taking one or two factors in explaining the variability in the returns of all six portfolios.

Keywords: Value Factors, SMB, HML, Adjusted R2, Seasonality, December Effect, November Effect