Author(s)

Yikun Li ¹

Affiliation(s)

¹ Department of Financial Management, Metropolitan College, Boston University, Taiyuan, Shanxi, 030001, China

Corresponding Author

Yikun Li

ABSTRACT

The paper consists of two parts. The first part creates the SMB ("Small-minus-Big") and HML ("High-minus-Low") factors according to the rules laid out in "Common risk factors in the returns on stocks and bonds" (Fama, E. F., & French, K. R, 1992) through the application of Python in quantitative finance. It also creates the momentum factor in Fama-French Four-Factor Model proposed by "On Persistence in Mutual Fund Performance," (Mark M. Carhart, 1997). The second part examines the effectiveness of factors in explaining anomalies in equity returns. The paper concludes that these three factors to some extent explain anomalies in equity returns.

KEYWORDS

Fama-French Four-Factor Model, SMB ("Small-minus-Big"), HML ("High-minus-Low"), Quantitative Finance, Anomalies, Equity Returns

CITE THIS PAPER

Yikun Li, Examination of Fama-French Four-Factor Model: Creating Factors in Quantitative Finance. Financial Engineering and Risk Management (2023) Vol. 6: 1-7. DOI: http://dx.doi.org/10.23977/ferm.2023.060201.

REFERENCES

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[3] Fama, E. F., & French, K. R. (1992). Common risk factors in the returns on stocks and bonds (pp. 392-449). University of Chicago Press.
[4] Gil Aharoni, Bruce Grundy and Qi Zeng, "Stock returns and the Miller Modigliani valuation formula: Revisiting the Fama French analysis", Journal of Financial Economics • November 2013.
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[6] Mark M. Carhart, "On Persistence in Mutual Fund Performance," Journal of Finance 52 (March 1997), pp. 57–82.
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[8] Rehman, Alam, and Qadar Bakhsh Baloch. "Evaluating Pakistan's Mutual Fund Performance: Validating through CAPM and Fama French 3-Factor Model." Journal of Managerial Sciences 10.1 (2016).
[9] Bello, Zakri Y. "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 2.2 (2008).
[10] Rath, Subhrendu, and Robert B. Durand. "Decomposing the size, value and momentum premia of the Fama–French–Carhart four-factor model." Economics Letters 132 (2015): 139-141. 

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