Comparative Research of the Fitness of CAPM and Fama-French Three-factor Models

Runqi Zhu

doi:10.54691/bcpbm.v30i.2568

Authors

Runqi Zhu

DOI:

https://doi.org/10.54691/bcpbm.v30i.2568

Keywords:

CAPM; Fama-French Three-factor; Financial Risk; Explanatory power.

Abstract

CAPM theory is the core of the modern financial theory. As time went on, more and more people began to invest in CAPM research, many of the contradictions of CAPM have emerged, not least the highly idealistic assumptions and harsh implementation conditions. Different from CAPM, which only has a single factor of market risk beta, The inclusion of size premium and book-to-market ratio premium in this model can effectively explain stock market results. By introducing the model concept of CAPM and FF3 and comparing the empirical evidence in Sattar, M., this paper explains why the explanatory power of CAPM factors is weak. By referring to previous scholars' articles, this essay contrasts and elucidates how the market factor, size premium, and book-to-market ratio premium may all effectively account for stock market returns. According to the study's findings, the three-factor Fama French model has a stronger capacity for explanation than the CAPM model.

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