Size, BM, and momentum effects and the robustness of the Fama-French three-factor model: Evidence from New Zealand

Document Type

Journal Article


Emerald Group Publishing Limited


Faculty of Business and Law


School of Accounting, Finance and Economics




Nartea, G. V., Ward, B. D., & Djajadikerta, H. G. (2009). Size, BM, and momentum effects and the robustness of the Fama-French three-factor model: Evidence from New Zealand. International Journal of Managerial Finance, 5(2), 179-200. Available here


Purpose ‐ This paper aims to confirm the existence of size, book to market (BM) and momentum effects in the New Zealand (NZ) stock market. It also aims to compare the performance of the CAPM, the Fama-French (FF) model, and Carhart's model in explaining the variation of stock returns. Design/methodology/approach ‐ The paper adapts the Fama and French methodology using a 2×3 size-BM ratio sort. It also forms three portfolios based on past returns to verify the momentum effect. Findings ‐ The paper documents significant BM and momentum effects but a relatively weaker size effect. The paper finds some improvement in explanatory power provided by the FF model relative to the CAPM but it still leaves a large part of the variation in stock returns unexplained. The FF model is also unable to explain the strong momentum effect in New Zealand. Practical implications ‐ The findings imply that: cost of capital estimates would be more accurate using Carhart's model; portfolio managers can increase returns by investing in small and high BM firms that are recent winners; performance evaluation should take into account the size, BM, and momentum effects; and the existence of size and BM return premia appear to be rewards to risk bearing. Originality/value ‐ The existing literature testing the robustness of the FF model in markets outside the USA is sparse, especially in emerging markets, with most of these studies suffering from data problems. The NZ stock market provides an interesting setting for such a study because of its unique characteristics.





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