Comparing Factor Models in the Indian Stock Market
Main Article Content
Keywords
Size, Value, Momentum, Profitability, Investment
Abstract
Which factor model better explains portfolio return variation in India? This study compares the Fama French Three Factor Model, Carhart Four Factor Model & Fama French Five Factor Model in the Indian Stock Market. S&P BSE 100 index companies are studied over 16 years, i.e., April 2005 to June 2021. Four fundamentals & a momentum variable (Market Capitalization, P/B ratio, past performance, Profitability & Investment) based factor mimicking portfolios had been formed using the Fama French (1993, 2015) & Carhart (1997) Methodology. Portfolios for dependent variables were formulated using a double-sorting process keeping the Size factor conditional. The degree of multicollinearity is required to be checked & hence VIF test is conducted before regression analysis. It was found that the Carhart Four-factor model performs better compared to the other two models. Findings of the study can be useful to fund managers, managers, investors & traders in selecting stocks for portfolio management, trading & risk management.
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References
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