A Statistical Comparison of the CAPM to the Fama-French Three Factor Model and the Carhart's Model

Global Journal of Finance and Banking Issues, Vol. 2, No. 2, 2008

11 Pages Posted: 20 Jan 2010

See all articles by Zakri Y. Bello

Zakri Y. Bello

Central Connecticut State University - Finance

Date Written: July 8, 2008

Abstract

The goal of this study is to compare the CAPM to the Fama-French (FF) Three Factor Model and to Carhart‟s extension of the FF Model with regard to (1) statistical goodness of fit, and (2) the quality of prediction. My sample consists of actively managed domestic equity mutual funds and the sample period is April 1986 to March 2006. My results indicate that each of the three regression lines explains about 71% of equity fund returns. Thus, with respect to the statistical goodness of fit, the difference between the three models is not significant. However, with respect to the quality of prediction, the FF Three Factor Model is a remarkable improvement over the CAPM, and the Carhart Model is a significant improvement over the FF Model. I do not find any evidence of harmful collinearity in my analyses

Keywords: Asset Pricing Models, Statistical Goodness of Fit, Model Specification, Multicollinearity

JEL Classification: G11, G12, C12, C13, C25

Suggested Citation

Bello, Zakri Y., A Statistical Comparison of the CAPM to the Fama-French Three Factor Model and the Carhart's Model (July 8, 2008). Global Journal of Finance and Banking Issues, Vol. 2, No. 2, 2008, Available at SSRN: https://ssrn.com/abstract=1536149

Zakri Y. Bello (Contact Author)

Central Connecticut State University - Finance ( email )

1615 Stanley Street P.O. Box 4010
New Britian, CT 06050-4010
United States
860-832-3262 (Phone)

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