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Research Article Open Access

Validity of Fama and French Three Factor Model with Capm in Kuala Lumpur Stock Exchange Market

Abstract

The debate on the stock return predictability of Capital Asset Pricing Model (CAPM) versus Fama French Three Factor Model (FF3FM) is still persistent in the academic literature. The scholarly attention on the FF3FM is seemingly inadequate relative to its return predictability evidenced in several studies. This study compares CAPM versus FF3FM using multiple regression analysis and Thiel’s U2 Test for stock returns in Kuala Lumpur Stock Exchange. Explanatory power of market, size, and growth factors for the time-series expected stock returns is also examined in this study. The results indicate significant improvement of market beta in explaining the stock returns. FF3FM is found to have stronger explanatory power than that of CAPM as the adjusted R2 value of the FF3FM is higher than that of CAPM. FF3FM is found better than CAPM also based on the Thiel’s U2 Test value.

Zobaer Hasan MD, Azizul Baten MD, Mohan Uddin MD

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