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Constructing and Testing Alternative Versions of the Fama–French and Carhart Models in the UK
Author(s) -
Gregory Alan,
Tharyan Rajesh,
Christidis Angela
Publication year - 2013
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12006
Subject(s) - capital asset pricing model , value (mathematics) , econometrics , economics , factor analysis , financial economics , momentum (technical analysis) , actuarial science , efficient market hypothesis , mathematics , statistics , horse , stock market , biology , paleontology
This paper constructs and tests alternative versions of the Fama–French and Carhart models for the UK market with the purpose of providing guidance for researchers interested in asset pricing and event studies. We conduct a comprehensive analysis of such models, forming risk factors using approaches advanced in the recent literature including value‐weighted factor components and various decompositions of the risk factors. We also test whether such factor models can at least explain the returns of large firms. We find that versions of the four‐factor model using decomposed and value‐weighted factor components are able to explain the cross‐section of returns in large firms or in portfolios without extreme momentum exposures. However, we do not find that risk factors are consistently and reliably priced.