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Multi-Factor Extensions of the Capital Asset Pricing Model: An Empirical Study of the UK Market
Mälardalen University, School of Education, Culture and Communication.
2015 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

The point of this thesis is to compare classic asset pricing models using historic UK data. It looks at three of the most commonly used asset pricing models in Finance and tests the suitability of each for the UK market. The models considered are the Capital Asset Pricing Model (1964, 65 and 66) (CAPM), the Fama-French 3-Factor Model (1993) (FF3F) and the Carhart 4-Factor Model (1997) (C4F). The models are analysed using a 34 year sample period (1980-2014). The sample data follows the structure explained in Gregory et al (2013) and is compiled of stocks from the London Stock Exchange (LSE). The stocks are grouped into portfolios arranged by market capitalisation, book-to-market ratio, past 2-12 month stock return and past 12 month standard deviation of stock return. Statistical analysis is performed and the suitability of the models is tested using the methods of Black, Jensen \& Scholes (1972), Fama \& MacBeth (1973) and Gibbons, Ross \& Shanken (1989). The results compare descriptive and test statistics across the range of risk factors and test portfolios for the each testing method on all three models. They show that although the UK market has some noticeable factor anomalies, none of the models clearly explains the 1980-2014 stock returns. However, of the three models, C4F shows the highest explanatory power in predicting stock returns.

Place, publisher, year, edition, pages
2015. , 77 p.
Keyword [en]
Asset Pricing Models, Portfolio Theory, Applied Mathematics, Finance, CAPM, Equities, UK
National Category
URN: urn:nbn:se:mdh:diva-29829OAI: diva2:875694
Subject / course
Mathematics/Applied Mathematics
2015-09-24, Västerås, 19:15 (English)
Available from: 2015-12-04 Created: 2015-12-01 Last updated: 2015-12-04Bibliographically approved

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Johnson, Calum
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