Relative performance of the camp, the fame-french 3-factor and the carhart 4-factor models in the context of Ho Chi Minh stock exchange

Abstract

Sharpe (1964) and Lintner (1965) revolutionize the way academics and practitioners define and determine asset returns by introducing the Capital Asset Pricing Model (CAPM). Until now, it is still the dominant model in terms of popularity in international and domestic market alike. However, the inaccuracy of the model is controversial. There are many studies inclusive of Fama and French (1992, 1993, 1996, 2012) and Carhart (1997) pointing out that beta alone fails to explain the variation of returns. The Fama-French Three-factor Model (FF3M) and the Carhart Four-factor Model (C4M) are then introduced in an attempt to better predict asset returns. The debates remain unsolved and no clear conclusions are made as of which model performs better than the others. The results from literature suggest that the relative explanatory power of asset pricing models is time-specific, market-specific and test-specific. This study’s main purpose is to determine the superior among the CAPM, the FF3M and the C4M in the context of Vietnam stock market. Two formal tests namely time-series regression centering GRS F-Test and Fama-MacBeth cross-sectional regression are employed to provide to a thorough comparison. The former test suggests that the C4M provides a mild improvement from the FF3M while the famous CAPM fails. The latter test yields a similar result about the CAPM and the superiority of the C4M is statistically proven.