Applicability of CAPM and Fama French Three-Factor Model: A Test From Vietnam Stock Market
Bach, Quoc Anh (2018)
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Capital Asset Pricing Model or CAPM being suggested and developed by Sharpe (1964), Lintner (1965) and Black (1972) is considered one of the functional contributions to Finance. This model believes that risk premium of all risky assets is a linear function of their covariance with market portfolio. The recent study of Fama and French (1996 and 2006) introduces us to the Three-factor model theory which questions the applicability of CAPM in the real market and its ability in explaining stock returns as well as value premium effects in American stock market.
This thesis is inspired by the study of Fama and French (1996 and 2006), but with another data sample from Vietnam stock market, one of the youngest stock markets in the world. Multiple regressions are used to compare the performance of CAPM and Fama French three-factor model in explaining stock returns and value premium effects in Vietnam stock market.
The findings show that Fama French three-factor model performs significantly in Vietnam stock market and is superior to CAPM in explaining both stock returns and value premium effects. In three-factor model, market risk premium factor affects the most on stock returns, followed by value factor and size factor, respectively. Besides this study also supports the applicability of CAPM in Vietnam stock market.
This thesis is inspired by the study of Fama and French (1996 and 2006), but with another data sample from Vietnam stock market, one of the youngest stock markets in the world. Multiple regressions are used to compare the performance of CAPM and Fama French three-factor model in explaining stock returns and value premium effects in Vietnam stock market.
The findings show that Fama French three-factor model performs significantly in Vietnam stock market and is superior to CAPM in explaining both stock returns and value premium effects. In three-factor model, market risk premium factor affects the most on stock returns, followed by value factor and size factor, respectively. Besides this study also supports the applicability of CAPM in Vietnam stock market.