Tests of the Fama and French Three Factor Model In Iran

Fama and French (1992) found that beta has little or no ability inexplaining cross-sectional variation in stock returns, but thosevariables such as size and the book-to-market ratio do. Since the time ofthe original publication of the Fama and French findings, Controversyand intense debate has emerged in the academic literature over theempirical performance of beta and the CAPM. This paper compareCAPM versus Fama and French three factors model and investigates theexplanatory power of market beta, firm size, and book-to-market ratio,regarding the cross-sectional expected stock returns in Tehran stockexchange. The results indicate that Fama and French three factor modelhas strong explanatory power than CAPM and the explanatory power ofmarket beta is significantly improved and successfully captures thecross-sectional variation in expected stock returns for the full sampleperiod