Fama-French Model Explanations of the Stock Market Anomaly

Abstract

Abstract: The main purpose of this study is to test the ability of the Fama-French model is opposed to CAPM in explaining seasonality effect. The study employed multiple time series regressions on monthly returns data of nine double-sorted ME/BM portfolios constructed from 220 to 500 stocks listed on Bursa Malaysia over the period of 1985:01 2005:12. The results indicate that when CAPM is used to explain portfolio returns, evidence of February effect persist in portfolios that are composed of stocks of small and distressed firms. Nonetheless, the seasonality effect disappears entirely when the Fama French model is used. Overall, this finding lends strong support for the hypotheses that seasonality effect that has seemingly been persistent in Bursa Malaysia is merely due to model inadequacy.