A Modified Fama and French (1993) Three-factor Asset Pricing Model: Evidence from the UK Equity Market

Abstract

The objective of this study is to examine the modified Fama and French (1993) three-factor asset pricing model, suggested by Cremers et al. (2012), in the UK equity market, over the period from October 1980 to June 2015. The article follows the correct Lewellen et al. (2010) framework for evaluating asset pricing models. In contrast to Michou et al. (2007) and Gregory et al. (2013), the results suggest the use of the modified Fama and French (1993) three-factor asset pricing model in practical applications that require the estimation of expected returns in the UK equity market. The results are robust using the same sample period in Gregory et al. (2013). Overall, the result suggests to follow the correct Lewellen et al. (2010) framework for evaluating asset pricing models in pricing the UK equity market returns.