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Size and Value Effect: Application of the Fama French Three-Factor Model in the Irish Stock Market

Sonubi, Yewande (2019) Size and Value Effect: Application of the Fama French Three-Factor Model in the Irish Stock Market. Masters thesis, Dublin, National College of Ireland.

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Abstract

There are several studies of the Fama French three factor model in international capital markets. This study empirically examines the feasibility of the Fama French three factor model as an asset pricing model in the Irish stock market. According to Fama and French methodology, monthly returns of twenty-six stocks over the period of 2011 to 2015 is used to construct four portfolios based on market capitalisation (size) and book equity-to-market equity (value) ratio. A time series regression approach is employed using the ordinary least square method by regressing the excess return of the portfolios against three independent factors (excess return on the market, size and value). The findings show that there is evidence for excess return on the market and value factors in the Irish stock market and that the Fama French three factor model has a higher explanatory power than the capital asset pricing model (CAPM). The market risk factor is positive and the most significant among the three risk factors. However, the size factor is significant for portfolios containing both small and big or large capitalisation stocks. This suggests that the small capitalisation stocks did not realise higher premiums than the big or large capitalisation stocks. The value factor is positive and significant for portfolios containing high book equity-to-market equity stocks. This indicates that high book equity-to-market equity stocks outperform low book equity-to-market equity stocks. The results are partially consistent with those of the Fama and French (1993), this implies that the Fama French three factor model does not completely hold for the Irish stock market. The empirical evidence of this study can be a basis for further research of other factors that explain in more detail the variation in the average returns of portfolios in the Irish context.

Item Type: Thesis (Masters)
Subjects: H Social Sciences > HG Finance > Investment
H Social Sciences > HG Finance > Investment > Stock Exchange > Irish Stock Exchange
Divisions: School of Business > Master of Science in Finance
Depositing User: CAOIMHE NI MHAICIN
Date Deposited: 21 Oct 2019 09:57
Last Modified: 21 Oct 2019 09:57
URI: http://trap.ncirl.ie/id/eprint/3972

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