The Effectiveness of CAPM and Fama-French Three-Factor Models in Healthcare and Real Estate Industries

Abstract

As the world’s largest economy and an important hub for cross-border capital flows, monetary policy adjustments in the U.S. will affect the cross-border capital flows and the structure of net international investment positions. From the 1990s to the present, the U.S. has experienced four rounds of interest rate hike cycles as domestic inflationary pressures fluctuate. In this paper, we analyze the changes of KML, SMB, HML and other factors of the stocks of leading companies in the medical and real estate industries based on regression analysis. Specifically, to investigate the applicability of the CAPM model and FF3 model in the medical and real estate industries in the context of the Fed's interest rate hikes, we construct regression models and fit the corresponding coefficients in the CAPM model and FF3 model, respectively. According to the analysis, the FF3 model has a better performance in most cases and can better explain the impact of the Fed's interest rate hike on the healthcare and real estate sectors compared to the CAPM model. On this basis, it can still be used as an effective tool for asset valuation and resource allocation after the Fed's interest rate hike. These results shed light on guiding further exploration on asset pricing.