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A Study into the Feasibility and Deployment of the Four-Factor Asset Pricing Model in the UK Stock Market (2012)

Ref: busman0069

In this study, the author will investigate whether there is not sufficient amount of empirical studies regarding the four-factor model in the UK. Therefore, examining the effectiveness of this asset pricing model is assumed crucial. This study will test the feasibility of the robustness four-factor model for the stocks traded on the London Stock Exchange (LSE) during July 2000 to June 2007. The author wants to investigate whether other risk factors (size effect, book-to-market effect and momentum effect) besides market beta are also explanatory variables of the variation in average returns in the UK stock market. Most of the empirical studies has focused on the US portfolios, if (Fama and French 1998) findings for the US portfolios capable to confirm outside the US market, then we assume our results can contribute to both individual and institutional investors who can form their optimal portfolios according to the significant measures in the UK.  For example, (Fama and French 1996) state that size premium and value premium have a strong explanatory power to the cross-sectional in average stock returns. Therefore, we believe that with a better and accurate benchmark, individual or institutional investors able to construct their portfolios based on these risk factors and estimate their expected stock returns.  Another motivation for this MBA dissertation is to investigate for the (Carhart 1997) four-factor model by adding a momentum factor into the Fama and French three-factor model. The author will examine whether momentum risk can takes account of the fact that past stock prices will have a significant impact on the returns made. There is limited documenting for examine the four-factor model in the UK stock market. Therefore, we suggest our analysis results can give valuable information to individual or institutional investors for investment purposes or future research in the UK stock market. The author will specifically ask:

1)    Can the Four-Factor model (Market factor, Size factor, Book-to-market factor and Momentum factor) show a significant value in explaining the average stock returns in the UK stock market? (Fama and French 1995) state that if stocks are priced rationally, the multi-factor model should able to give explanation the cross sectional variation in stock returns. For example, size and book-to-market become common risk factors which sensitive in returns.
2)    Does the Four-Factor model works well in different capital markets (UK) other than the U.S portfolios?
3)    What are the outcomes from the Four-Factor model when we test in different market conditions (Bull and Bear market)?

  • 15,000 words – 44 pages in length
  • Good use of literature
  • Good in depth analysis
  • Well written throughout
  • Ideal for business and finance students

1.0 Introduction
Research Background

2.0 Literature Review
Prior Evidence of the Four-Factor Model in the UK

3.0 Data and Methodology
Research Data
Research Methodology

4.0 Empirical Results and Discussion
Summary Statistics
Data Analysis
Full Sample Regression
Bull Market Regression
Bear Market Regression
Behaviour Finance Arguments

5.0 Summary and Conclusion

6.0 References


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