An Augmented Fama and French Three-Factor Model

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1、AnAugmentedFamaandFrenchThree-FactorModel:NewEvidenceFromAnEmergingStockMarket1SunilKBundooDepartmentofEconomics&StatisticsUniversityofMauritiusAbstractThereisalackofempiricalevidenceofwhetherthesizeandvaluepremiumarepresentinemergingequitymarketsgenerally,andparticularlyintheemerging

2、Africanstockmarkets.Thisstudyprovidessomeempiricalevidenceinanemergingmarket,theStockExchangeofMauritius,andoffersadditionaloutofsampleevidencethatthesizeandthebook-to-equityeffectsareinternationalincharacter.ItalsoinnovatesbyaugmentingtheFamaandFrenchthree-factormodel.Onemayexpecttha

3、taFamaandFrenchthree-factorthattakesintoaccountthetime-variationinrisk,thesignificanceofthesizeandbook-to-marketequityeffectsmaybereducedorevendisappear.TheempiricalresultsconfirmthattheFamaandFrench(1993)threefactormodelholdsfortheStockExchangeofMauritius.Moreover,theempiricalresults

4、fortheaugmentedmodelshowthattheFamaandFrenchthreefactormodelisrobustaftertakingintoaccounttime-varyingbetas.1Addresscorrespondenceatsbundoo@uom.ac.mu11.0IntroductionTheStockExchangeofMauritiushasbeeninoperationforslightlymorethan15years.AsatDecember2004,therewere40companieslistedonthe

5、officialmarketwitha2marketcapitalisationofapproximately67billionrupeesandontheOverTheCounter(OTC)markettherewere78companies.TradingontheofficialmarketstartedinJuly1989,withfivelistedcompaniesandamarketcapitalisationof1.4billionrupees.SummarystatisticsontheofficialmarketaregiveninTable

6、1below.ThetradingfrequencyontheofficialmarkethasincreasedprogressivelyfromtwiceweeklytothreetimesweeklyinJanuary1994beforemovingtodailytradinginNovember1997.ThestockexchangeisrunandmanagedbytheStockExchangeofMauritius(SEM)LimitedandissupervisedandregulatedbytheFinancialServicesCommiss

7、ionundertheStockExchangeAct1988.TheSEMDEXistheindexofalllistedordinarysharesanditisavalue-weightedindex.Companieslistedontheexchangeareclassifiedintosevenmainsectorsoftheeconomy,namely,Banks,InsuranceandotherFinance,Industry,Investments,Sugar,Commerce,Leisure&HotelsandTransport.Therat

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