Testing the fama-french three-factor model : Case sudy on Ho Chi Minh stock exchange (Hose)

Abstract

This research aims to examine the validity of Fama–French Three–factor model (FF3M) for listed companies on Ho Chi Minh Stock Exchange (HOSE) from 2008 to 2012. Using the Pooled Ordinary Least square regression model to analyze the data, the author finds that the robustness of FF3M is confirmed on HOSE. To be more specific, excess returns of stocks listed on HOSE are controlled by all three factors: Market Rm-Rf, Size SMB (market capitalization) and Value HML (Book-tomarket equity or BE/ME ratio). Meanwhile the Market and Value factor have positive effect on stock’s rate of returns, Size factor shows negative one. In other words, companies with low market-cap and high BE/ME ratio tend to generate higher return than the others. Moreover, Market is the strongest factor that explaining the behavior of stock’s return following by Size and BE/ME ratio. What is more, the conclusion of better explanatory power of FF3M than CAPM is not completely convinced for this period. Finally, the author also identify that BSI (Finance and Insurance); C47 (Construction); AAM (Manufacturing); BTT (Wholesale and Retail trade); DVP (Transportation and Storage) and C21 (Real estate) are the outstanding performers on HOSE.