The Fama French Model or the Capital Asset Pricing Model: International Evidence

Abstract

This research paper attempts to evaluate the benefits of using the Fama and French Model by comparing them with those resulting from the use of the Capital Asset Pricing Model. Local, International, and European Monetary Union functional forms were considered, in an attempt to raise the following questions: Does the calculation method to determine size and financial distress premium have any significance for the financial analyst? Do the foreign risk premiums of the Fama and French Model have any importance for the financial analyst? Firstly, models based on European Monetary Union factors produce the worst results, independently of any Capital Asset Pricing Model or Fama and French Model consideration. Secondly, independently of the model, the expected return of big and low book-to-market stocks is more reliable. This is particularly observable for big firms, as it does not occur for low book-to-market firms using Fama and French Models. Finally, the Fama and French Model is notoriously preferable in comparison with the Capital Asset Pricing Model for small and high-book to market firms: in this case, the introduction of international factors increases the reliability of expected returns.