Persistence of Size and Value Premia and the Robustness of the Fama-French Three Factor Model in the Hong Kong Stock Market

Investment management and Financial Innovations, V5 (4), pp. 39-49, 2008.

11 Pages Posted: 30 Jul 2013

See all articles by Gilbert Nartea

Gilbert Nartea

University of Canterbury - College of Business and Law

Christopher Gan

Lincoln University (NZ)

Ji (George) Wu

Massey University - School of Economics and Finance

Date Written: December 30, 2008

Abstract

We use Hong Kong stock market data for 1982-2001 to test the persistence of the size and value premia and therobustness of the Fama-French (FF) three-factor model in explaining the variation in stock returns. We document a statistically significant and persistent size effect or size premium that is robust even for non-January months but is heightened in January. We also find that the reversal of the size effect in January reported byChui and Wei (1998) is unique to their study period, while the general reversal ofthe size effect reported by Lam (2002) may be due to a sample dominated by firms with low to medium book equity-to-market ratios. The book to market effect or value premium is weaker than the size effect and less consistent than in Fama and French (1993) and Drew and Veeraraghavan (2003). Our results also support the explanation that the size and value premia are rewards for risk bearing consistent with the efficient market hypothesis. We further find a large improvement in explanatory power provided by the French andFama model relative to the CAPM but that the FF model is mis-specified for the Hong Kong market.

Keywords: asset pricing, Fama-French three-factor model, size effect, book to market effect, Hong Kong

JEL Classification: G12

Suggested Citation

Nartea, Gilbert and Gan, Christopher and Wu, Ji (George), Persistence of Size and Value Premia and the Robustness of the Fama-French Three Factor Model in the Hong Kong Stock Market (December 30, 2008). Investment management and Financial Innovations, V5 (4), pp. 39-49, 2008. , Available at SSRN: https://ssrn.com/abstract=2303617 or http://dx.doi.org/10.2139/ssrn.2303617

Gilbert Nartea

University of Canterbury - College of Business and Law ( email )

Christchurch, 8140
New Zealand

Christopher Gan

Lincoln University (NZ) ( email )

PO Box 85084
Ellesmere Junction Road/Springs Road
Lincoln, 7647
New Zealand

Ji (George) Wu (Contact Author)

Massey University - School of Economics and Finance ( email )

Private Bag 102904
North Shore
Auckland, Auckland 0745
New Zealand
+6292127089 (Phone)

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