Comparison of the Applicability of CAPM and Fama-French Model in Different Regions

Abstract

Asset pricing has always been a popular topic in economic research. The research on the relationship between risk and the stock expected return has attracted much attention, and many theoretical models have experienced evolution and upgrading. Capital Asset Pricing Model (CAPM), as a single factor model, mainly studies the relationship between the expected return of assets and risky assets in the securities market and evaluates how the equilibrium price is formed. It considers that the main factor affecting the stock return is a non-systematic risk. Afterward, Fama and French proposed the three-factor model. It believed that the coefficient β could not fully explain the differences in the returns of different stocks, and then added the scale factor and book to market ratio factor to improve the explanatory performance of the model. Therefore, the excess returns can be regarded as compensation for the risk factors not reflected by β in CAPM. Based on the application in different countries and regions, this paper compares the two models.