Which Factors are Priced? An Application of the Fama French Three-Factor Model in Australia

This empirical study is conducted to apply the Fama French three-factor model in the Australian context using the most recent daily data for the period of 5 years from July 2009 to May 2015. The focus of this study is on various approaches of portfolio formation adopted in previous empirical studies in Australia and overseas. Three scenarios are constructed to assess the robustness of the estimated coefficients from the model. The approach proposed by Fama and Macbeth (1973) - the two-stage cross-sectional regression technique is adopted in this paper. The findings from this study under various scenarios and various approaches to portfolio formations across portfolios are mixed. This study finds that only book-to-market factor is priced in Australia. However, there is a negative relationship between this factor and a return of a stock which is in contrast with an expectation of the Fama French three-factor model. As such, a claim from a recent study in Australia that for the first time, Fama French three-factor model produces a consistent outcome is simply exaggerated. It can be argued that this new finding is an outcome of another “data mining” which is generally labelled for the findings from the Fama French three-factor model