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A STATISTICAL COMPARISON OF THE CAPM TO THE FAMA-FRENCH THREE FACTOR MODEL AND THE CAHARTíS MODEL

Zakri Y. Bello1

Central Connecticut State University, USA.

ABSTRACT

The goal of this study is to compare the CAPM to the Fama-French (FF) Three Factor Model and to Carhart‟s extension of the FF Model with regard to (1) statistical goodness of fit, and (2) the quality of prediction. My sample consists of actively managed domestic equity mutual funds and the sample period is April 1986 to March 2006. My results indicate that each of the three regression lines explains about 71% of equity fund returns. Thus, with respect to the statistical goodness of fit, the difference between the three models is not significant. However, with respect to the quality of prediction, the FF Three Factor Model is a remarkable improvement over the CAPM, and the Carhart Model is a significant improvement over the FF Model. I do not find any evidence of harmful collinearity in my analyses.

Key words: Asset Pricing Models, Statistical Goodness of Fit, Model Specification, Multicollinearity

JEL Classification: G11, G12, C12, C13, C25.