Persistence of Size and Value Premia and the Robustness of the Fama-French Three Factor Model : Evidence from the Hong Kong Stock Market

We use Hong Kong stock market data from 1982-2001 to test the persistence of the size and value premia and the robustness of the Fama-French (FF) three-factor model in explaining the variation in stock returns. We document a statistically significant and persistent size effect or size premium that is robust even for non-January months. The book to market efffect or value premium however is weaker and less consistent than in Fama and French (1993) and Drew and Veeraraghavan (2003). Our results also support the explanation that the size and value premia are rewards for risk bearing. We further find a large improvement in explanatory power provided by the FF model relative to the CAPM but that the FF model is mis-specified for the Hong Kong market