On the two-stage estimation of the Fama-French three factor model: evidence from Taiwan

Authors: Tsung-Chi Cheng, Hung-Neng Lai, Pei-Fen Tsai

Journal: Chiao Da Management Review. Dec. 2006, 26(2): 21-48.

Keywords: Three Factor Model; Two-stage estimation; Errors in Variables

Abstract:
In this paper, a few common approaches to implementing the two-stage test on the Fama-French three-factor models are examined for Taiwan’s stock market. Much of the evidence favors the MKT factor, while the support for the HML factor is weak. The significance of the risk premium is deeply dependent on the grouping and rolling procedure. Adjustments for errors-in-variable or non-synchronous trading do not affect the results very much.