Research Article Open Access

The Effectiveness of Fama French 3 Factor Model in Predicting Globally Diversified Portfolio Returns

Abstract

The Fama French Model which followed the CAPM has been widely debated by various researchers on issues like whether value and size premiums are caused by the underlying risk factors of firms falling within these categories or due to the incorrect extrapolation of past earnings growth by the market and subsequent correction of the mispricing errors. The current study aims at testing the effectiveness of the Fama French Model in predicting portfolio returns especially during the crisis periods. In other words, using an extensive and well diversified sample of Global stocks listed on the Dow Jones Index, we test whether the Fama and French Model is able to significantly capture the systematic risk present in the Macroeconomy. We also shed some light on the possible additional factors which overpower the Fama French factors in explaining the systematic risk prevailing in the economy

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